LIBRARY 

OF   THK 


University  of  California. 


Class 


Banking  and  Commerce 


A    PRACTICAL    TREATISE   FOR   BANKERS    AND   MEN   OF 
BUSINESS.    TOGETHER    WITH    THE    AUTHORS 
EXPERIENCES      OF     BANKING      LIFE     IN 
ENGLAND  AND  CANADA  DUR- 
ING    FIFTY     YEARS 


By  GEORGE  HAGUE 

Formerly   General  Manager   of   The    Merchants    Bank   of  Canada 


Experien  t ia    docet 


NEW      YORK 

THE    BANKERS    PUBLISHING    COMPANY 


fi£K£fiAL 


Copyright,    1908 


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INTRODUCTION. 

THE  following  work  is  the  reflection  of  a  banking  and  commercial 
experience  extending  over  more  than  forty  years  of  active  life  in 
England  and  Canada,  together  with  the  observations  gained  in  the 
supervision  of  the  New  York  business  of  one  of  the  larger  Canadian 
Banks  established  in  that  centre. 

This  treatise,  it  will  be  observed,  relates  not  simply  to  banking,  like  the 
practical  work  of  Mr.  Gilbart,  or  the  scientific  treatise  of  a  political 
economist  like  McLeod,  but  covers  also  the  field  of  commercial  and  manu- 
facturing operations  as  w-ell,  and  discusses  the  causes  of  success,  or  fail- 
ure, in  each  of  them. 

The  author  has  taken  particular  pains  to  open  up  the  relation  of 
Banking  to  Commerce,  as  a  handmaid  and  tributary  to  it,  and  this,  as 
distinguished  from  other  modes  of  employing  and  investing  money;  and 
has  endeavored  to  show  the  danger  of  confounding  the  functions  of  a 
banker  with  those  of  a  capitalist,  or  a  Loan  Comj^any,  whose  sphere  is 
found  in  the  lending  of  money  on  mortgage,  or  the  undertaking  of  loans 
for  long  periods  to  governments  or  corporations. 

It  \vas  long  ago  observed  that  a  large  part  of  the  art  of  banking  con- 
sisted in  knowing  the  difference  between  a  bill  of  exchange  and  a  mort- 
gage. 

Simple  as  this  may  sound,  it  opens  up  a  whole  world  of  interesting 
study;  and  to  become  thoroughly  master  of  it,  in  its  practical  application, 
has  baffled  the  ability  of  many  a  man  otherwise  eminent  in  the  sphere  of 
finance.  And  the  failure  to  carry  out  this  distinction  in  practice  has 
involved  man}'  an  institution  of  these  times  in  financial  overthrow.  All 
this  Avill  be  considered  in  the  course  of  the  work  now  submitted,  and  as 
the  author  has  largely  drawn  from  his  own  experience  and  observation, 
he  thinks  it  may  be  well  to  say  a  few  words  about  them. 

Commencing  his  banking  career  in  one  of  the  joint-stock  banks  of 
the  north  of  England,  having  its  centre  in  a  large  manufacturing  town, 
with  branches  in  the  agricultural  district  around,  the  author  became  famil- 
iar with  representatives  of  nearly  every  class  of  the  producing  community 
of  England. 

This  bank,  in  which  he  served  for  nearly  eleven  years,  was  founded  by 
men  of  remarkable  intelligence  and  ability,  who  had  studied  the  principles 
on  whicli  banking  should  be  conducted,  and  carried  them  into  effect  so 
judiciously,  that  the  bank  has  had  an  uninterrupted  career  of  prosperity 
since  its  foundation,  and  is  still  well  known  as  one  of  the  best-managed 
banks  in  England. 

In  course  of  time,  and  after  some  years'  experience  in  a  large  business 


iv  INTRODUCTION. 

office,  he  entered  the  service  of  one  of  tlie  chartered  banks  of  Canada, 
and  there,  first  as  Branch  ]\Ianager  and  then  as  Cashier  (a  term  equiv- 
knt,  in  Canada,  to  general  manager),  he  was  brought  into  contact  with 
the  agriculturists,  merchants  and  manufacturers  of  the  Dominion,  all 
which  prepared  him  for  the  larger  sphere  to  which,  in  the  providence  of 
God,  he  was  afterwards  called,  viz.,  to  the  general  managership  of  one 
of  the  larger  banks  of  Canada  whose  business  extends  over  nearly  every 
district  of  the  countrj',  from  the  Atlantic  to  the  Pacific.  These  larger 
banks  all  have  offices  in  New  York,  and,  in  connection  with  the  New  York 
Agency,  the  author  became  familiar  with  the  various  classes  of  business 
carried  on  by  foreign  banks  in  that  city. 

Note   Circulation. 

While  engaged  in  the  first  of  these  spheres  of  work  in  Canada,  the 
Government  of  the  day,  under  the  guidance  of  its  Finance  Minister,  en- 
deavored to  change  the  basis  of  the  note  circulation.  The  change  pro- 
posed was  in  furtherance  of  a  certain  theory  of  note  issues,  which  he  had 
adopted.  The  plan  proposed  would  have  met  the  pressing  necessities  of 
the  Government  at  the  time,  but  it  would  seriously  have  crippled  the  power 
of  the  banks  to  carry  on  the  business  of  the  agricultural  districts  of  the 
country.  As  it  was  in  one  of  these  that  the  business  of  the  bank  he 
was  then  connected  with  was  mainly  done,  he  made  strenuous  efforts, 
along  with  others  similarly  situated,  to  induce  the  Government  to  modify 
its  scheme,  in  so  far  as  to  permit  the  banks,  under  regulations,  to  continue 
to  circulate  their  own  notes.  These  measures  compelled  a  closi"  study  of 
the  M'hole  question  of  note  circulation,  and  the  author  was  drawn  into 
taking  a  prominent  part  in  the  discussions  that  arose  respecting  it.  His 
opinions  gradually  took  the  shape  of  doubt  as  to  the  desirability  of  any 
Government  issuing  notes  for  circulation;  all  such  notes,  in  every  coun- 
try of  the  world  where  they  were  issued,  even  in  the  United  States,  be- 
ing at  that  time  at  a  heavy  discount.  The  Canadian  Government,  how- 
ever, was  too  strong  to  permit  of  its  hands  being  tied  in  the  matter,  and 
a  system  of  Government  issues  was  established,  under  very  strict  regula- 
tions as  to  redemption,  which  has  continued  to  work  side  by  side  with  the 
banking  issues  of  the  country  ever  since. 

After  some  3'ears,  an  attempt  was  made  by  the  Government  to 
assimilate  the  circulation  of  Canada  to  that  of  the  United  States.  The 
bankers  doing  business  in  the  agricultural  districts  saw,  however,  that 
such  a  system  would  be  inimical  to  their  interests  and  those  of  their  cus- 
tomers, and  in  fact  to  the  interests  of  the  country  generally.  They  there- 
fore united  in  an  informal  association,  of  which  the  author  became  secre- 
tary, to  oppose  the  measure.  The  discussions  that  arose,  and  which  were 
taken  up  by  Boards  of  Trade  throughout  the  country,  were  continued 
through  several  sessions  of  Parliament,  but  ultimately,  under  the  auspices 
of  another  Finance  Minister,  a  compromise  was  effected,  and  a  measure 


INTRODUCTION.  v 

ado{)ted  whicli  in  its  main  features  has  continued  to  be  the  banking  law 
of  Canada  to  this  day.* 

Bankruptcy. 

The  manner  in  which  debtors  that  arc  insolvent,  or  supposed  to  be  so, 
can  settle  with  their  creditors,  is  a  matter  of  vital  importance  to  bankers, 
inasmuch  as  a  large  part  of  their  assets  consists  of  the  personal  obliga- 
tions of  persons  engaged  in  business,  some  of  whom  from  time  to  time 
may  find  themselves  unable  to  discharge  those  obligations.  At  one  period 
of  the  author's  experience  in  Canada,  the  Bankruptcy  Law  was  of  such 
a  nature,  and  so  administered,  as  to  form  a  positive  temptation  to  traders 
in  temporary  embarrassment. 

The  times  that  were  passing  over  the  country  were  such  as  to  make 
trading  difficult,  and  as  one  insolvency  almost  invariably  gives  rise  to 
others,  the  number  and  amount  of  yearly  insolvencies  rose  to  amounts 
far  beyond  the  average.  It  is  vain  to  expect  that  at  any  time,  even  the 
most  prosperous,  trading  can  be  conducted  without  insolvencies  at  all, 
but  there  is  a  law  of  average  in  this  matter  as  in  others,  and  the  fluctua- 
tions of  insolvencies  reflect  very  fairly  the  conditions  of  trade  at  any  par- 
ticular period.  At  the  period  spoken  of  insolvencies  were  so  numerous 
as  to  become  a  constant  source  of  anxiety  to  all  the  banks  of  the  country, 
and  the  evil  was  being  constantly  aggravated  by  the  development  of  a 
class  of  insolvency  agents  who  made  it  their  business  to  assist  insolvents 
to  obtain  settlements  under  the  Act;  and  many  of  whom  became,  almost 
in  spite  of  themselves,  promoters  of  insolvency.  The  Bankruptcy  Act  of 
Canada,  at  that  time,  was  looked  upon  by  most  bankers  as  really  cal- 
culated to  promote  insolvency  rather  than  otherwise.  In  these  circum- 
stances both  bankers  and  all  the  large  traders  who  gave  credit  to  customers 
were  quite  willing  to  allow  the  act  to  expire,  by  efflux  of  time,  and  rather 
to  endure  the  evils  of  having  no  bankruptcy  law  at  all,  than  face  the  pos- 


»  During  these  discussions  several  proposals  were  made  by  the  banks  to  the 
Government  with  a  view  to  further  securing  their  note  issues.  Of  these  the  most 
important  was  that  all  such  issues  should  form  a  preferential  charge  upon  the 
whole  assets  of  the  issuing  bank,  including  the  double  liability  of  stockholders. 
This  they  contended  was  just  and  equitable,  inasmuch  as  noteholders  are  in- 
voluntary  creditors. 

The  other  proposal  was  that  a  Redemption  Fund  should  be  created  by  pro 
rata  contributions  from  the  banks,  which  fund,  if  impaired,  should  be  made  up 
by  further  contributions.  Some  bankers  considered  this  fund  to  be  unnecessary, 
as  the  privileged  lien,  in  their  opinion,  would  be  amply  sufBcient.  They  were 
willing,  however,  to  fall  in  with  the  idea  of  a  redemption  fund,  as  it  would  make 
assurance  doubly  sure.  Both  these  proposals  were  adopted  by  Parliament.  Ex- 
perience, however,  has  demonstrated  that  the  privileged  lien  was  sufficient;  for 
although  there  have  been  several  bad  failures  since  the  fund  was  created,  arising 
from  fraud  or  serious  mismanagement,  the  assets  have  never  failed  to  redeem 
the  notes  with  sufficient  promptitude  to  prevent  necessity  for  calling  upon  the 
fund.     It   therefore  remains   intact   to  this  day. 

It  only  remains  to  be  stated  that  the  whole  business  of  issuing,  redeeming 
and  destroying  notes  in  Canada  has  been  placed  under  the  supervision  of  the 
Bankers'  Association,   which  was  created  a  Corporation  for  the  purpose. 


vi  INTRODUCTION. 

sibility  of  a  rrcnrrcnce  of  the  evils  that  had  so  sorely  troubled  them 
for  years  back. 

But  after  a  time  a  new  crop  of  evils  sprung  up,  and  grew  to  such  a 
height  and  extent  that  wholesale  traders  and  bankers  became  urgent  in 
their  demands  for  the  passing  of  a  new  law.  Men  failed  and  gave  pref- 
erences to  relations  and  favored  creditors  to  such  an  amount  as  to  work 
Hagrant  injustice  to  the  rest  of  their  creditors,  and  the  law  afforded  no 
redress. 

Men  went  on  trading  after  they  were  insolvent  and  frittered  away 
their  whole  estate,  while  their  creditors  were  powerless  to  stop  them. 
They  could  thus  go  on  buying  goods  while  there  was  no  prospect  of  pay- 
ing for  them,  and  in  other  ways  committing  grievous  trade  wrongs,  of 
which  the  ordinary  law  took  no  cognizance. 

The  Bankers'  Association,  under  these  circumstances,  had  full  dis- 
cussions of  the  whole  matter,  and  considered  what  the  provisions  of  an 
equitable  law  of  bankruptcy  should  be.  There  was  little  difference  of 
opinion  upon  the  subject,  and  they  arrived  at  conclusions  which  were  in 
due  time  communicated  to  the  Government  of  the  day.  The  ideas  em- 
bodied in  these  conclusions  will  be  found  largely  reflected  in  the  chapter 
on  Bankruptcy. 

It  will  be  observed  that  this  work  has  been  chiefly  written  from  a 
Canadian  standpoint.  This  was  inevitable,  seeing  that  the  author 
drew  so  largely  from  his  own  experience  and  observation,  as  any  author 
must  do  whose  work  is  of  a  practical  character.  Thus  Mr,  Gilbart's  able 
v.ork  is  written  from  the  standpoint  of  I>ondon,  and  reflects  largely 
a  London  banker's  ideas  on  the  subject.  That  excellent  little  treatise 
called  "The  Country  Banker"  gives  the  views  of  a  banker  from 
the  country  districts  of  England.  The  author,  however,  though  writing  in 
Canada  and  from  that  standpoint,  has  endeavored  to  avoid  a  narrow  and 
partial  view  of  both  banking  and  commerce,  and  has  founded  his  remarks 
on  the  broad  principles  which  are  common  to  both  of  them  everywhere.  He 
therefore  confidently  hopes  that  the  work  may  be  found  a  useful  hand- 
book to  bankers  and  merchants  in  every  part  of  the  country  to  which  it 
may  find  its  way. 

After  a  life  of  business  activity  protracted  beyond  the  usual  course  of 
human  affairs,  he  now,  in  retirement,  is  able  to  look  back  quietly  upon 
the  activities  and  conflicts  of  former  j'cars,  and  can  sympathize  with  a 
new  generation  who  arc  fighting  their  way,  with  varied  success,  through 
the  same  conditions  and  circumstances.  He  has  written  this  work  largely 
for  their  guidance;  and  not  for  theirs  only,  but  for  the  guidance  of  their 
customers;  for  he  lias  stood  on  both  sides  of  the  counter  in  his  time.  He 
has  felt  more  than  once  at  the  end  of  a  bank  year,  but  especially  when  a 
General  Manager,  as  if  he  had  just  concluded  a  voyage  round  the  world, 
and  was  thankful   to  have  brought  his  vessel  once  more  safe  into  port. 


INTRODUCTION.  vii 

In  these  voyages  (to  pursue  the  simile)  he  had  the  opportunity  of  noting 
the  shoals  and  quicksands  that  lay  in  the  way,  and  of  noting  also  the 
indications  of  the  weather,  so  as  to  look  out  for  coming  storms  and  learn 
when  it  was  necessary  to  take  in  sail,  and  when  he  might  spread  his  sail 
to  the  breeze  with  safety.  He  thus,  in  course  of  time,  accumulated  a 
body  of  signs  and  indications  of  which  he  frequently  availed  himself. 
All  this  he  has  endeavored  to  embody  in  a  readable  form  in  this  trea- 
tise, which  he  now  sends  forth,  with  the  hope  that  it  may  serve  for  the 
guidance  of  men  who  are  pursuing  a  course  in  which  many  difficulties 
and  dangers  have  to  be  encountered,  but  which  may  be  safely  followed 
if  men  are  only  willing  to  learn  by  the  experience  of  others,  and  to  give 
close  attention,  hour  by  hour,  as  the  mariner  does  to  his  compass,  to  the 
aspect  of  things  around  them.  It  is  a  course,  in  truth,  in  which  many 
have  been  shipwrecked,  but  the  shipwreck  has  generally  arisen  from  inat- 
tention, from  conceit,  from  unwillingness  to  take  advice,  and  learn  by  the 
experience  of  those  who  have  gone  before  them.  Geo.  Hagce. 

Montreal,  March,  IQOS. 


CONTENTS 

CHAPTER   I.  Page 

ELEMENTARY    PRINCIPLES    OF    BANKING 1       ^ 

CHAPTER  II. 

THE    ELEMENTARY    PRINCIPLES    OF    COMMERCE    IN    CONNEC-  < 

TION   WITH    BANKING    8 

CHAPTER  III. 

FURTHER   PRINCIPLES  OF   BANKING   AND   DEVELOPMENT   OF 

PRIVATE   BANKING    IN    ENGLAND    1^ 

CHAPTER  IV. 
JOINT  STOCK   BANKING   IN   GENERAL    IT 

CHAPTER    V. 
THE   INTERNAL  ECONOMY  OF  A  JOINT  STOCK   BANK    22 

CHAPTER    ri. 
DIRECTORS    OF    AN    INCORPORATED    BANK    28 

CHAPTER   VII. 

OFFICERS   OF   AN   INCORPORATED   BANK    HAVING   BRANCHES 

—THE    GENERAL    MANAGER    38 

CHAPTER  VIII. 

THE    SUCCESSFUL    MERCHANT    48       "^ 

CHAPTER   IX. 
THE   SUCCESSFUL  MERCHANT    (Continued)    55 

CHAPTER   X. 
MANUFACTURING     65 

CHAPTER   XI. 

THE    SUCCESSFUL    MANUFACTURER     70 

CHAPTER  XII. 

ELEMENTS   OF   SUCCESSFUL   BANKING    '»      ^ 

CHAPTER  XIII. 
THE     BANKER'S    INFORMATION     AND    OTHER    ELEMENTS    OF 

SUCCESS     83 

CHAPTER  XIV. 
LOANS     9» 


X  CONTEXTS. 

CHAPTER  XV.  Page 

LOANS    TO   DEALERS    I\    GRAIN    AND    OTHER    AGRICULTURAL 
PRODUCE     104 

CHAPTER   XVI. 
LOANS    JiO  MANUFACTURERS   AND   IMPORTERS    113 

CHAPTER  XVII. 
LOANS  TO  RAILWAYS  AND   RAILWAY  CONTRACTORS    128 

CHAPTER  XVIII. 

LOANS   AND   ADVANCES   TO   GOVERNMENTS    AND    MUNICIPAL 
CORPORATIONS 136 

CHAPTER  XIX. 
LOANS    ON    STOCKS    AND    BONDS    144 

CHAPTER  XX. 
THE  DISCOUNTING  OF  TRADE  BILLS    147 

CHAPTER  XXI. 
FOREIGN    BILLS 157 

CHAPTER  XXII. 
OVERDRAFTS   IN   CANADA   AND   CASH   CREDITS   IN   SCOTLAND  171 

CHAPTER  XXIII. 
BANK    RESERVES     178 

CHAPTER  XXIV. 
BANK    INVESTMENTS    AS    RESERVES    187 

CHAPTER  XXV. 
SECURITY    AND   SECURITIES    IN   GENERAL    101 

CHAPTER  XXVI. 
SECURITY  AND  SECURITIES   IN  GENERAL    (Continued)    -.'04 

CHAPTER   A' AT//. 
BANKING  AND  COMMERCIAL  LOSSES   213 

CHAPTER  XXVIII. 
BANKINC   AM)  COMMERCIAL   LOSSP:S    (Continued)    221 

CHAPTER  XXIX. 

LOSSES    IN    CONNECTION    WITH    TIN'.    I.AH'ORTING    IHADE    AND 

OTHER  LINES  OF  BUSINESS   22S 


CONTEXTS.  xi 

CHAPTER  XXX.                                               Page 
FRAUDS,   FORGERIES   AM)   DEFALCATIONS    239 

CHAPTER  XXXI. 
A    BANKRUPTCY    LAW    251 

CHAPTER   XXXI 1. 

INSURANCE  IN  ITS  RELATION  TO  BANKING   264 

CHA  P  TE  R  XXXIII. 

THE  NATIONAL   BANKS  OF  THE  UNITED  STATES  AND  AMERI- 
CAN   BANKING     269 

CHAPTER  XXXIV. 
VARIOUS   THEORIES   OF    NOTE   CIRCULATION    278 

CHAPTER  XXX  v. 
BANKING    ACT    OF    CANADA    290 

CHAPTER  XXXVI. 

MNANCIAL  PANICS  AND  REVULSIONS  IN  ENGLAND  AND  THE 

I'NITED    STATES     30-2 


THE   AUTHOR'S    EXPERIENCES   IN   FIFTY   YEARS  OF   BANKING 
LIFE   IN   ENGLAND   AND  CANADA,. 

CHAPTER    I. 

EXPERIENCES  OF  BANKING  LIFE  IN  ENGLAND 315 

CHAPTER    II. 

J^IY  EXPERIENCES  OF  BANKING  IN  CANADA 327 

CHAPTER    III. 
MY  EXPERIENCES  AS  A  BRANCH  MANAGER 336 

CHAPTER    IV. 

I  .Vl^LlilENCES  IN  HEAD  OFFICE  MANAGEMENT  IN  TORONTO..  342 

CHAPTER    V. 

NEGOTIATIONS  WITH  THE  GOVERNMENT  RESPECTING  CIRCU- 
LATION       353 

CHAPTER    VI. 

MY  EXPERIENCE  AS  GENERAL  MANAGER  IN  MONTREAL 
INCLUDING  REFERENCES  TO  BUSINESS  IN  NEW  YORK, 
CHICAGO.   .AHLAVAUKEE   AND   TO  THE    BARING   CRISIS 367 


A  Practical  Treatise  on  Banking 
and  Commerce. 

CHAPTER    I. 
ELEMENTARY  PRINCIPLES  OF  BANKING. 

A  Banker's  Service  to  the  Community — Development  of  Modern 
Banking — Employment  of  a  Bank's  Funds — Relations  Between 
the  Banker  and  the  Merchant. 

EVERY  man  who  expects  to  derive  his  subsistence  from  a  community 
will  find  himself  under  obligation  to  render  service  thereto.     This 
is  a  universal  law  of  civilized  life,  in  default  of  obedience  to  which 
another  law  will  come  into  operation,  viz.,  that  if  a  man  will  not  work, 
neither  shall  he  eat.^ 

A  Banker's  Service  to  the   Community. 

Service  to  a  community  is  of  various  kinds,  depending  generally  upon 
the  inclination  of  the  individual.  Some  men  devote  themselves  to  produc- 
tion in  one  or  other  of  its  manifold  forms:  a  class  of  service  that  comes 
first  in  order  of  time  in  every  community,  but  survives  in  the  most  ad- 
vanced stage  of  development.  Others  devote  themselves  to  selling  what 
others  produce.  Others  to  the  work  of  transportation  by  land  or  water. 
These  are  all  departments  of  what  is  generally  known  as  business.  They 
are  all  forms  of  that  labor  which  brings  profit,  and  are  all  to  be  found  in 
those  rudimentary  stages  of  a  community  with  which  the  people  of 
Canada  and  the  United  States  are  familiar.  Long  before  there  is  any 
requirement  for  the  services  of  a  person  whose  business  it  is  to  take  care 
of  money,  and  to  deal  in  it,  there  has  been  some  progress  made  in  the 
clearing  or  preparation  of  land:  in  making  roads,  in  building  houses,  and 
al'^o  in  the  carrying  on,  in  a  rudimentary  form,  of  farming,  store-keeping, 
f       ng,  and  other  handicrafts.     In  addition  to  tliis,  there  generally  arises 

1  '^"  might  be  supposed  that  the  class  of  wealthy  men,  and  men  of  leisure, 
who  t-:-^-ually  arise  in  a  more  advanced  stage  of  society  would  be  an  exception 
u-'l-^r  all  circumstances  to  the  above  remark.  But,  as  a  matter  of  fact,  there 
o.. -.  but  few  members  of  this  class  who  do  not  devote  more  or  less  time  to  gra- 
tuitous service  for  the  community  they  live  in.  In  England,  they  serve  as  un- 
paid Magistrates,  Members  of  Parliament,  and  Guardians  of  the  poor,  as  well  as 
in  numerous  forms  of  benevolent  activity.  On  this  Continent,  the  larger  part  of 
such  men  devote  time  to  church  and  benevolent  work,  sitting  on  numerous 
boards  and  committees,  undertaking  treasurerships,  and  various  other  unpaid  but 
useful  offices.  In  fact,  if  the  services  of  our  leisure  class  were  to  be  estimated  on 
a  commercial  basis,  it  would  amount  to  a  sum  that  would  startle  the  most  cap- 
tious objectors. 
1 


2  BANKING    AND    COMMERCE. 

the  class  of  professional  men  who  make  or  administer  law,  eure  diseases, 
or  care  for  the  spiritual  interests  of  the  people. 

For  the  first  few  years,  a  very  small  supply  of  actual  money  suffices 
an  infant  comnnmity  in  the  conduct  of  its  business.  Barter  in  various 
forms  is  the  ordinary'  medium  of  exchange.  So  many  yards  of  cotton 
for  so  many  bushels  of  wheat;  so  much  of  nets  or  ammunition  for  so 
many  fish  or  skins.  This  and  such-like  modes  of  making  exchanges  serve 
all  the  practical  purposes  of  life,  and  at  this  stage  of  development  all 
wealth,  roughly  speaking,  consists  of  land,  houses,  or  goods. 

But  as  time  goes  on.  Money  in  the  shape  of  notes  or  coin  finds  its 
way  to  the  community;  and  one  man  after  another  who  prospers  in  his 
affairs  comes  to  have  more  or  less  of  it. 

When,  from  such  simple  rudiments  as  a  blacksmith's  smithy,  a  store, 
a  grist  and  carding  mill,  and  a  tavern,  at  some  crossroads  of  the  olden 
time,  or  a  railway  station  of  the  present,  there  has  grown  up  an  aggrega- 
tion of  such  concerns,  some  of  them  in  a  well-developed  form;  and  when, 
all  round  about,  the  forest  or  prairie  has  been  converted  into  productive 
farms,  sufficient  money  will  generally  have  been  accumulated  to  give  rise 
to  the  question.  Who  is  to  take  care  of  it?  The  answer  to  this  question 
opens  up  another  class  of  service ;  that,  namely,  rendered  by  a  person  who 
has  for  generations  been  known  as  A  BANKER.  This  being  understood, 
let  us  enquire  under  what  conditions  any  man  is  likely  to  imdertake  that 
service,  and  how  lie  is  to  be  remunerated  for  it.^ 

Development  of  Modern  Banking. 

Putting  aside,  at  present,  considerations  as  to  the  origin  of  corpora- 
tions like  the  Bank  of  England  and  the  Bank  of  Scotland,  it  will  be  inter- 
esting to  note  how  the  simple  function  of  taking  care  of  the  spare  money 
of  a  man's  neighbors,  gradually  assumed,  one  after  another,  the  compli- 
cated forms  of  modern  banking. 

The  first  "banker"  (if  he  may  be  so  called  at  this  stage)  is  usually  one 
of  those  prosperous  men  of  business  who  are  to  be  found  in  every  com- 
munity, and  Avhose  store,  warehouse,  or  factory  is  known  to  everybody  in 
it.  All  his  surroundings  suggest  that  he  is  a  man  of  means.  He  is  also 
a  man  of  reputation.  He  has  liad  money  dealings  with  his  neighbors,  and 
all  respect  and  trust  him.  Ele  has  money  of  his  own,  and  has  a  strong 
box  or  chest  in  which  to  place  it,  as  everybody  knows.  What  more  nat- 
ural, then,  than  that  he  shall  be  asked  to  take  care  of  the  money  of  his 
neighbors,  as  well  as  his  own.^ 

Some  of  the  more  cautious  ones  will,  indeed,  never  trust  their  money 
out  of  their  o\vn  possession.  Some  do  not  want  it  to  be  known  that  they 
have  money  at  all.  The  secretive  instinct  prevails  everywhere,  and  is  to 
be  found  even  in  these  days  of  higlily  developed  banking.  The  failure  of 
a  banking  corporation  or  of  a  private  banker,  even  now,  invariably  drives 
some  people  back  to  the  rudimentary  stage  of  taking  care  of  their  own 
monev.     In  this,  however,  tliey  encounter  another  danger,  viz..  that  their 


ELEMENTARY   PRINCIPLES  OF   BANKING.  S 

money  maj'  be  stolen.  The  majority  of  the  people,  however,  in  our  infant 
communities,  are  willing  to  trust  their  money  to  the  care  of  a  wealthy 
neighbor.  In  most  cases,  they  will  expect  it  to  be  as  much  at  their  com- 
mand as  if  it  was  locked  up  in  a  cupboard  of  their  own.  In  some  cases, 
however,  they  may  consent  to  give  notice  of  withdrawal. 

Thus,  at  the  very  outset,  we  are  confronted  with  two  of  the  principles 
that  have  always  governed  banking  operations,  and  which  have  as  much 
force  to-day  as  they  ever  had.  The  greatest  banking  corporations  in  the 
world  are  not  exempt  from  enquiring  as  to  money  deposited  with  them,  is 

it  to  be  WITHDIIAWN   AT   CALL,  Or  is  it  TO   BE  SUBJECT  TO   NOTICE.'* 

The  first  arrangement  is  at  the  root  of  nearly  all  the  multifarious 
forms  in  which  banking  is  carried  on,  for,  as  will  be  subsequently  shown, 
it  involves  the  obligation  (1)  of  constant  attendance;  (2)  of  keeping  a 
sufficient  stock  of  money  on  hand;  and  (3)  having  a  counter,  apparatus, 
and  officers  for  the  transaction  of  business.  Most  important  of  all,  whilst 
it  necessitates  the  keeping  of  a  certain  stock  of  money  on  hand,  it  governs 
the  manner  in  which  all  the  rest  may  he  employed. 

The  person  who  undertakes  the  safe-keeping  of  money  and  its  return 
when  called  for  will  soon  ascertain  that  the  commodity  he  has  undertaken 
to  safeguard  is  dift'erent  in  kind  from  all  other  commodities.  It  is  repre- 
sentative of  property  rather  than  property  itself;  and  the  obligations  he 
enters  into  with  regard  to  it  are  different  not  only  in  degree,  but  in  kind, 
from  those  which  persons  enter  into  with  regard  to  other  property.  If, 
for  example,  a  farmer  undertakes  to  take  care  of  a  neighbor's  horse,  he 
must  return  that  very  animal  when  called  upon.  If  a  wharfinger  under- 
takes the  care  of  a  merchant's  iron,  flour,  or  cotton,  he  delivers  back  the 
very  goods  he  receives. 

But  the  care  of  money  is  governed  by  different  considerations.  No 
man  who  delivers  money  to  a  banker  for  safe-keeping  wants  back  the 
very  notes  or  coins  that  he  deposited.  What  he  wants  is,  not  the  identical 
pieces  of  gold  or  paper,  but  the  value  of  them  in  current  money,  or  in 
some  other  form  that  ma}^  suit  his  convenience;  for  example,  in  a  draft 
or  bill  of  exchange.' 

The  relation  therefore  between  the  depositing  customer  and  his  banker 
is  not  that  of  owner  and  bailee,  but  of  creditor  and  debtor.  This  be- 
ing so,  the  banker  is  not  bound  to  take  care  of  his  creditor's  money  as  a 
wharfinger  takes  care  of  his  customer's  goods.   But  he  is  bound — and  this 

2  It  was  indeed  once  stated  to  me  by  a  person  acquainted  with  the  facts, 
that  on  the  occasion  of  the  first  meeting  of  the  directors  of  a  newly  organized 
bank  in  an  American  city,  the  President,  addressing  his  colleagues,  observed 
that  persons  would  no  doubt  shortly  make  their  appearance  to  deposit  money, 
and  as  it  was  essential  that  each  customer's  money  should  be  on  hand  when 
wanted,  it  was  desirable  to  provide  a  large  wallet  divided  into  compartments. 
In  which  each  person's  separate  deposit  could  be  placed,  duly  labeled.  In  that 
case,  he  observed,  the  bank  would  never  be  called  on  for  money  without  being 
able  to  respond  at  once. 

The  good  man's  care  for  the  safety  of  the  customer's  money  was  commend- 
able, but  he  did  not  tell  his  colleagues  how  the  bank  was  to  make  profits  under 
such  an  arrangement. 


4  RANKING    AND    COMMERCE. 

is  the  first  simple  contract  of  banking — to  repay  the  amount  deposited, 
or  such  part  of  it  as  may  be  required,  at  the  time  agreed  upon,  whether 
on  demand  or  after  notice. 

In  the  meantime,  a  banker  has  the  power,  and  the  law  gives  him  the 
right,  to  deal  with  the  money  as  if  it  were  his  own;  that  is,  he  has  the 
power  to  use  the  money  at  his  pleasure  for  the  purpose  of  making  a  profit 
out  of  it.  The  obligation,  however,  to  pay  a  depositor's  money  on  de- 
mand, at  the  very  moment  it  is  asked,  is  of  the  most  stringent  nature. 
Universal  custom  insists  on  a  rigid  enforcement  of  it.  A  merchant  may 
ask  for  time  from  his  creditors;  a  banker  never.  If  he  is  reduced  to  this 
position  he  must  close  his  doors. ^ 

Common  prudence  therefore  dictates  to  one  who  is  undertaking  the 
responsibilities  of  a  banker  for  the  first  time,  that  he  shall,  at  the  outset, 
keep  a  considerable  part  of  the  money  lodged  with  him  in  his  own  pos- 
session. 

As  time  elapses,  and  the  conditions  of  the  supply  and  demand  for 
money  gradually  assume  a  more  settled  form,  such  a  banker  will  come  to 
understand  what  portion  of  his  funds  he  must  keep  on  hand,  and  what 
portion  he  can  otherwise  employ. 

The  Emplovment  of  a  Bank's  Funds. 

But  the  question  at  once  arises,  in  what  form  it  may  be  otherwise  em- 
ployed, consistently  Avith  the  peculiar  requirements  of  his  business? 
Money  may  be  employed  in  various  ways  to  make  profit,  and  the  mode  of 
employment  will  be  largely  influenced  by  the  consideration  whether  it  is 
a  man's  own,  or  whether  he  is  taking  care  of  it  for  another.  Some  modes 
for  the  employment  of  money  have  been  demonstrated  by  experience 
to  be  suitable  for  a  banker;  others  have  been  equally  proved  by  experi- 
ence to  be  highly  unsuitable. 

(1)  For  example,  a  man  who  has  money  at  his  command  may  buy 
productive  property  A^-ith  it,  and  so  obtain  a  reasonable  return  in  rent. 
A  banker,  however,  would  soon  discover  this  to  be  a  very  dangerous  busi- 
ness. He  might  be  compelled  to  close  his  doors  and  wind  up  his  business 
although  in  possession  of  immense  amounts  of  valuable  property. 

(2)  He  can  lend  money  on  mortgage  of  property,  and  draw  the  inter- 
est.     This  is  just  as  unsuitable  for  a  banker  as  the  other;  for  wherever 

3  There  have  been,  however,  some  curious  exceptions  to  this.  There  was 
formerly  a  little  bank  in  Prince  Edward's  Island,  which  made  no  scruple  of 
telling  depositors  at  times  that  they  had  run  out  of  money,  but  would  have  some 
next  week — just  as  a  storekeeper  would  tell  a  customer  that  he  was  out  of  a 
particular  pattern  of  print.  There  was,  however,  some  excuse  for  this  in  the  fact 
that  the  Island  is  sometimes  cut  off  in  winter  from  the  outside  world  for  a  fort- 
night together.  This  bank  has  long  disappeared.  But  it  is  rather  odd  that  so 
recently  as  at  the  Louisville  bankers'  convention,  a  Cashier  of  a  National  bank  in 
Georgia,  with  a  cajiital  of  $25,000.  should  bo  boasting  of  the  arrangements  under 
which  business  was  done  in  his  part  of  the  State.  Our  customers,  he  said,  are 
never  discomposed  when  wo  run  out  of  money.  They  are  always  good  natured 
with   us.   and   willing   to   wait   while  wo   get  some! 


ELEMENTARY    PRINCIPLES   OP    BANKING.  5 

mortgages   exist,   they   run    almost    invariably    for    long   periods    of   time. 
Even  if  subject  to  gradual  repayment,  the  periods  are  of  slow  recurrence. 

(3)  When  a  community  is  sufficiently  developed  to  give  rise  to  them, 
money  can  be  invested  in  stocks  or  bonds.  It  is  open  to  a  banker  to  do 
this,  to  a  reasonable  extent,  as  will  be  hereafter  discussed  under  the  head 
of  investments,  provided  the  stocks  involve  no  liability  and  that  both 
stocks  and  bonds  are  such  as  can  be  readily  realized. 

(4)  He  can  engage  in  commercial  or  manufacturing  business.  This  is 
wholly  improper  for  a  banker  under  modern  conditions,  and  the  banking 
law  of  Canada  very  wisely  prohibits  it. 

The  above  are  all  legitimate  channels  of  investment  for  a  capitalist, 
as  such. 

But  a  banker's  business  is  governed  by  other  considerations.  It  is  of 
the  very  essence  of  a  banker's  business  to  incur  liabilities.  The  larger  a 
banker's  liabilities  are — paradoxical  as  it  may  sound — the  more  he  has  of 
the  elements  of  a  flourishing  business.  For  while  a  wealthy  mercantile 
house  will  pride  itself  on  having  no  liabilities  at  all,  the  pride  of  a  banker 
is  in  the  extent  to  which  his  liabilities  exceed  his  capital ;  or,  in  plain  terms, 
in  the  amount  of  his  deposits  and  note  issues.  His  creditors  may  be 
numbered  by  thousands,  and  the  total  amount  he  owes  them  may,  in  the 
aggregate,  be  ten  times  the  amount  of  his  capital  or  more.  He,  there- 
fore, as  a  simple  matter  of  prudence,  will  at  all  times  so  shape  his  busi- 
ness as  to  be  able  to  fulfil  his  daily  obligations.^ 

But  how  does  he  accomplish  this.^  In  every  community,  where  busi- 
ness has  become  developed,  there  will  invariably  be  found,  in  addition  to 
those  who  have  more  money  than  they  need,  another  class  of  persons,  who 
have  less  than  they  want.  Merchants,  manufacturers,  miners  and  trans- 
mitters of  commodities,  no  matter  in  how  simple  a  form  their  business  is 
carried  on,  need,  as  a  rule,  more  money  than  they  have  of  their  own.  And 
if  there  is,  in  that  community,  a  person  who  has  spare  money  under 
his  control,  he  will  certainly  be  interviewed  by  one  or  more  of  this  class 
with  proposals  for  the  use  of  a  portion  of  that  money.  Thus  we  arrive  at 
the  first  rapprochement  between  Banking  and  Commerce. 

That  bankers  should  listen  to  overtures  from  this  class  of  the  com- 
munity is  natural ;  and  this  for  several  reasons.  Their  business,  in  the 
very  nature  of  things,  is  in  a  constant  condition  of  flux.  It  is  active  at 
one  period,  and  dull  at  another;  largely  arising  from  the  changing  seasons 
of  the  year,  and  therefore  inevitable,  and  such  as  can  be  calculated  on. 
The  world's  commerce  is  conditioned  by  the  laws  which  govern  its  prod- 
ucts. These  products  come  largely  (but  not  wholly)  in  the  shape  of 
yearly  harvests;  some  of  food,  some  of  materials  for  clothing,  some  of 
appliances  for  shelter,  some  of  materials  for  producing  warmth  or  power. 

4  In  the  statements  that  joint  stock  banks  in  England  arc  bound  to  place 
before  the  public,  the  term  for  "deposits"  is,  "Debts  due  on  simple  contract." 
This  legal  term  puzzles  those  who  have  been  accustomed  to  the  term  deposits. 
But  the   phrase   is  strictly  accurate. 


6  BANKING    AND    COMMERCE. 

Stocks  of  great  ninsnitude  must  be  held  at  one  period,  to  be  succeeded  by 
a  largely  diminislied  volume  as  the  consumption  of  the  world  progresses. 
These  world-harvests,  therefore,  require  at  one  time  large  amounts  of 
money  for  the  purpose  of  purchasing,  storing  and  preparing  them  for 
use;  conversely,  an  immense  volume  of  money  is  set  free  when  purchas- 
ing is  succeeded  by  realization.  All  goods,  whether  material  products 
or  manufactured  articles,  are  ultimately  converted  into  money  or  book 
entries  or  paper  representing  money.  As  stocks  of  goods  increase,  the 
stocks  of  money  (using  that  word  in  a  broad  sense)  diminish,  and  as 
stocks  of  goods  decrease,  those  of  money  increase.*^ 

Relations  BetweeiJi  the  Banker  and  the  Merchant. 

This  being  the  case,  it  can  easily  be  seen  that  the  banker  and  the  mer- 
chant have  a  natural  relation  to  each  other.  The  one  deals  with  a  fluctuat- 
ing supply  of  money,  the  other  with  a  fluctuating  quantity  of  goods. 
The  banker  must  perforce  employ  his  money  in  fluctuating  transactions. 
The  merchant  desires  fluctuating  supplies  of  money  to  meet  his  require- 
ments. There  is  therefore  perfect  correspondence  between  them.  ^JThe 
business  of  both  is,  to  consider  how  these  fluctuations  are  likely  to  operate 
in  the  spheres  of  their  business^ 

/The  merchant,  naturally,  moves  first.  The  natural  order  is  for  the 
borrower  to  approach  the  lender.-  (Cases,  indeed,  sometimes  arise,  in  the 
stress  of  conipetition,  in  which  the  order  is  reversed,  but  the  results  are 
usually  injurious  to  both.)  (.The  merchant  approaches  the  banker,  stating 
that  the  time  has  come  for  him  to  buy  the  productions  of  the  district^  the 
lumberer,  that  he  is  about  to  send  his  gangs  into  the  woods ;  the  fisherman, 
that  his  fleet  is  ready  to  begin  operations;  the  manufacturer,  that  the 
year's  suppl}'^  of  wool,  grain,  iron  or  raw  cotton  is  arriving.  There  are 
as  numerous  varieties  of  such  applications  as  there  are  of  commercial 
avocations;  but  in  every  one  of  them  there  is  a  statement  of  a  want fi^ '^^^'^'^\ 
it-^Ty^waiA.  oi-moneij.  That  want  is  exactly  the  counterpart  of  a  want  on  « 
the  part  of  the  banker.  He  has  money  for  which  he  wants  profitable 
employment.  Thus  both  are  brought  within  the  operation  of  that— all- 
embra<HftgUaw  of  supply  and  demand,  which  governs  the  world's  transac- 
tions in  commerce  and  finance/as  surely  as  the  laws  of  gravitation  govern 
the  material  universe.  The  want  being  opened  up,  and  the  application 
made,  it  is  for  the  banker  to  determine,  having  understood  for  what 
length  of  time  advances  are  wanted,  what  securiti/  is  off'ered,  and  what  is 
the  position  of  the  person  proposing  to  borrow,  whether  he  can  (1)  make 
the  advance,  (2)  open  the  credit,  or  (3)   discount  the  paper.     These  are 

B  This  is  the  natural  law,  but  it  is  affected  by  numbers  of  counteracting:  cir- 
cumstances, the  cross-currents  of  trade  and  of  finance,  so  to  speak.  The  operation 
therefore  of  this  natural  law  is  not  always  easy  to  trace.  But  it  is  a  law  not- 
withstanding. And,  as  a  part  of  this  law,  all  stocks  of  goods  bear  interest— a 
fact   often   lost   sight   of. 


ELEMENTARY   PRINCIPLES   OF   BANKING.  7 

the  three  fundamental  forms  of  the  dealing  of  a  banker  with  the  business 
community. 

All  developments  of  business  may  at  times  afford  outlets  for  the  money 
a  banker  desires  to  employ.  They  are  legitimate  spheres  for  utilizing  his 
funds,  always  on  the  supposition,  never  to  be  forgotten,  that  such  loans 
shall  be  temporary,  repayable  at  a  fixed  time  which  can  be  depended 
upon,  that  they  shall  be  allowable  by  law,  and  within  the  legal  borrowing 
powers  of  the  corporation,  if  the  borrower  is  such.  And  it  is  not  too  much 
to  say  that  it  depends  upon  the  banker's  answers  whether  the  wheels  of 
the  machinery  of  commerce  in  his  district  are  to  begin  to  revolve  for 
another  season  or  not.  Naturally,  his  desire  is  that  they  shall;  for  upon 
this  a  thousand  other  things  depend,  in  which  no  one  is  more  interested 
than  the  banker  himself. 

There  is  this,  however,  further  to  be  said,  that  a  great  banking  cor- 
poration may  at  times,  and  in  certain  circumstances,  employ  a  portion  of 
its  resources  both  safely  and  profitably  in  other  spheres  than  commerce. 
They  may  assist  the  financial  operations  of  the  Government,  or  make  ad- 
vances to  municipalities,  or  assist  in  developing  enterprises  not  strictly 
commercial,  yet  which  have  a  close  relation  to  commerce — such  as  rail- 
ways, steamboat  lines,  gas  and  electric  corporations,  etc.  All  this  will  be 
fully  treated  of  in  succeeding  chapters. 


CHAPTER   II. 

THE   ELEMENTARY   PRINCIPLES   OF    COMMERCE   IN    CON- 
NECTION  WITH  BANKING. 

Beginnings  of  Commerce  in  North  America — Development  of  the 
Export  and  Import  Trade — Co-operation  of  the  Banker  in  the 
Carrying  on  of  Trade. 

IT  has  been  shown  in  a  former  chapter  how  naturally  the  business  of  a 
banker  is  connected  with  that  of  a  merchant.     Therein  are  roughly 
sketched  the  elementary  features  of  a  banker's  business,  as  custodian 
of  the  money  of  the  community  in  which  he  lives,  and  the  source  whence 
the  temporary  wants  of  the  commercial  portion  of  that  community  may 
be  supplied. 

As  this  is  a  treatise,  not  soleh'  respecting  banking,  but  banking  and 
commerce,  it  is  reasonable  to  consider  also  the  elementary  principles  of 
commercial  business,  including  in  that  term  not  merely  those  who  buy 
goods  and  sell  them,  but  those  who  in  various  ways  produce  the  goods 
required  to  be  sold. 

Beginnings  of  Commerce  in  North  America. 

Going  back,  as  some  persons  now  living  can  do,  to  the  earliest  devel- 
opments of  commerce,  in  certain  parts  of  this  continent,  the  time  can  be 
recalled  when  its  sole  production  was  in  the  shape  of  the  skins  of  fur-clad 
animals.  Before  the  time  of  farms  and  mills  and  crops  and  mines,  was 
the  time  when  the  trapper,  or  hunter,  penetrated  to  remote  depths  in  the 
forest,  or  to  unknown  wastes  of  the  prairie,  capturing  the  animals,  whose 
fur  was  so  highly  prized  by  the  civilized  world,  and  bringing  the  skins 
for  sale  to  a  central  depot.  There  still  flourishes,  on  both  sides  of  the 
Atlantic,  the  great  Trading  Corporation,  which  has  carried  on  this  traffic, 
without  interruption,  for  more  than  two  centuries,  over  half  a  continent, 
whose  centres  of  trade,  generally  called  "forts,"  have,  in  some  instances, 
developed  into  important  towns  and  cities  of  the  present  day.  In  these 
forts,  the  Hudson  Bay  Company  received  the  furs  from  the  Indian  tribes 
around  them,  and  gave  suitable  goods  in  exchange,  on  such  equitable 
terms  that  the  Great  Company  came  to  be  looked  upon  as  the  embodiment 
of  all  that  was  just  and  honorable,  as  well  as  rich  and  powerful.  This 
reputation,  first  acquired  many  generations  ago,  the  Hudson  Bay  Com- 
pany and  its  agents  have  never  lost. 

There  were  similar  operations  in  the  older  parts  of  French  Canada, 
New  England  and  New  York,  and  also  in  the  remote  regions  of  the  Ear 
West  of  the  United  States. 

These  were  the  first  beginnings  of  commerce  in  North  America,  and  a 
6 


ELEMENTARY   PRINCIPLES   OF   COM^NIERCE.  9 

legitimate  dovelopmeiit  it  was;  naimly,  the  gathering  together  from  re- 
mote regions  of  -what  was  useful  to  mankind,  and  bringing  back  in  ex- 
change such  products  of  other  parts  of  the  world  as  were  suitable  to  the 
wants  of  its  inhabitants. 

Development   of   the   Export   and   Import   Trade. 

But  the  simple  trade  of  early  days  on  this  Northern  Continent  has 
now  developed,  under  modern  forms  of  division  of  labor,  into  various  great 
lines  of  export  and  import  trade.  Instead  of  furs  as  the  sole  product  for 
export,  we  now  have  cotton,  grain  and  flour,  cattle  and  cheese,  pork  and  fish, 
timber,  iron,  and  gold,  as  well  as  many  varieties  of  manufactured  articles. 
And  instead  of  simple  imports  of  beads  and  ammunition,  we  have  laid  the 
whole  world  under  tribute  for  the  supply  of  our  wants,  and  built  ware- 
houses and  stores  in  our  cities  filled  with  every  possible  requirement  of 
modern  comfort  and  luxury.  For  the  great  Creator  of  the  world  has  so 
ordered  that  the  diff'erent  parts  of  the  earth  shall  have  productions  com- 
plementary to  each  other.  The  East  produces  what  the  West  needs,  and 
the  West  supplies  the  wants  of  the  East.  The  South  produces  one  set 
of  commodities,  the  North  another,  the  interchange  of  which  is  of  mutual 
advantage.  A  perfect  exemplification  of  this  may  be  found,  though  on  a 
small  scale,  m  the  simplest  store  of  any  Canadian  town  or  village.  In 
such  a  place  are  gathered  for  sale  the  products  of  almost  every  country 
under  the  sun.  China  has  contributed  tea,  Java  sugar,  the  West  Indies 
coffee  and  fruits.  On  its  shelves  are  to  be  found  spices  from  the  Eastern 
Archipelago,  and  currants  from  the  Mediterranean.  There  are  woolen 
goods  made  from  raw  materials  supplied  by  flocks  of  sheep  in  Australia, 
cotton  goods  from  the  produce  of  plantations  in  the  Southern  States  of 
America.  The  factories  of  Great  Britain,  France  and  Germany  have 
contributed  their  quota,  as  well  as  those  of  the  United  States  and  Canada. 
There  is,  in  truth,  scarcely  a  country  or  climate  in  the  world  which  has 
not  taken  part  in  furnishing  the  shelves  of  even  a  simple  Canadian  vil- 
lage store. 

A  remarkable  thing,  truly;  and  it  is  worth  considering  how  this  has 
come  to  be.  Evidently,  it  cannot  have  come  to  pass  without  a  combination 
of  mercantile  operations  on  the  part  of  numbers  of  individuals,  many  of 
whom  had  no  idea  what  the  final  result  would  be,  and  also  j  ust  as  compli- 
cated a  machinery  for  the  supply  of  money  during  the  process. 

Let  a  typical  example  be  taken.  How,  for  example,  has  that  chest  of 
tea  come  to  find  its  way  to  a  place  so  remote  from  that  of  its  growth  }  The 
cultivator  of  tea-plants  in  the  interior  of  China  cannot  have  any  idea  of 
the  persons  who  are  to  consume  his  produce.  But  these  small  parcels  of 
tea,  when  once  produced  by  the  cultivator,  become  almost  immediately 
subject  to  the  operations  of  Commerce.  The  country  trader  of  an  inte- 
rior province  makes  his  appearance,  and  purchases  the  products  of  a  few 
plantations  around  him.  His  knowledge,  however,  is  limited,  and  so  is 
the  extent  of  his  operations.     He  passes  the  tea  on  to  a  trader  of  larger 


10  BANKING    AND    COMMERCE. 

capacity  in  a  commercial  centre.  Even  he  has  little  comprehension  of 
the  distances  the  chests  will  have  to  traverse  before  reaching  their  final 
destination;  and  little  indeed  can  these  traders  comprehend  how  many 
agencies,  both  of  commerce  and  banking,  have  to  be  combined  before  the 
products  of  those  plantations  can  make  their  appearance  on  the  other 
side  of  the  world;  to  be  sold,  and  finally  consumed,  by  people  of  whom 
the  Chinese  tea-grower  and  merchant  have  no  more  idea  than  they  have 
of  the  inhabitants  of  the  moon. 

The  Chinese  tea-planter  never  writes  a  letter  to  the  Canadian  store- 
keeper, advising  him  that  he  is  growing  a  number  of  choice  tea-plants, 
and  asking  whether  he  will  buy  the  leaves  when  ready.  But,  if  he  did, 
and  the  storekeeper  listened  to  his  proposal  (let  us  imagine  this  for  a 
moment),  some  questions  would  arise,  one  of  which  would  be.  How  is  the 
tea  to  be  delivered.^  and  another.  How  is  it  to  be  paid  for? 

The  producer  and  possible  customer  are  thousands  of  miles  apart; 
separated  by  vast  stretches  of  sea  and  land,  how,  then,  can  they  trade 
together?  A  very  pertinent  question;  and  it  would  pass  the  wit  of  any 
of  the  declaimers  against  middle-men  to  answer  it,  except  in  one  way. 
They  must  he  brought  together  by  middle-men;  to  speak  in  language  be- 
coming the  subject,  by  the  merchant,^  who  will  conduct  his  operations  ac- 
cordingly. He  will  inevitably  follow  also  the  law  of  "buying  in  the 
cheapest  market,  and  selling  in  the  dearest,"  for  he  could  do  no  business 
if  he  did  not.  This  law  is  as  beneficent  as  it  is  inevitable;  inasmuch  as 
goods  are  cheap  wherever  they  are  redundant;  and  dear  where  they  are 
scarce.     At  every  stage  of  these  complicated  processes,  the  banker  finds 

6  For  the  sake  of  argument,  let  us  suppose  that  some  tea-planter  determines  to 
dispense  with  intermediaries  and  to  go,  in  person,  to  the  consumer  of  his  products. 
To  enable  him  to  do  this,  he  will  probably  borrow  money  from  one  of  the  numerous 
bankers  who  abound  in  the  interior  of  China.  The  project  would  certainly  find 
favor  with  those  who  imagine  the  merchant  to  be  the  natural  enemy  of  the  pro- 
ducer, and  who  sometimes  initiate  arrangements  with  a  view  to  dispensing  with 
him  altogether,  by  which — to  say  truth— they  generally  lose  money.  In  pursuance 
of  this  Idea,  the  planter  will  proceed  with  his  tea  to  the  nearest  river,  or  canal- 
down  which  he  voyages,  week  after  week,  to  a  seaport — with  his  tea.  He  then 
crosses  the  ocean,  lands  on  this  continent,  pays  customs  duties,  and  travels  thou- 
sands of  miles,  arriving  at  last  in  a  commercial  city  of  Canada  or  the  United 
States.     Thence  he  proceeds  to  find  his  customer,  and  dispose  of  his  product. 

But  is  it  not  evident  that  the  expenses  of  such  a  journey  as  this  would  more 
than  swallow  up  the  whole  value  of  his  tea,  and  probably  leave  him  stranded  in  a 
foreign  city,  unable  to  return  home?  For  the  few  chests  of  tea,  which  he  had  been 
able  to  produce,   would   have  had  to  bear  the  whole  expenses  of  his  journey. 

This  may  seem  an  absurd  illustration,  but  it  represents  what  would  be  inevi- 
table, in  case  the  theory  of  dispensing  with   "middle-men"   were   fully  carried   out. 

If  the  Ignorant  prejudice  against  intermediaries  were  to  prevail  generally,  al- 
most every  farmer  on  this  continent  would  have  to  undertake  some  such  a  journey 
every  year. 

The  first  Journey  of  the  kind  would  undeceive  him,  and  compel  him  to  ac- 
knowledge that  the  merchant  is  as  necessary  a  factor  in  business  as  the  pro- 
ducer. For  It  has  been  demonstrated  by  experience,  that  even  if  a  number  of 
farmers  pool  their  products,  and  appoint  an  agent  to  sell  for  them,  his  remunera- 
tion, on  the  average,  will  be  as  much  as  the  profits  of  a  merchant,  and  their  risk 
far  greater. 


ELEMENTARY    PRINCIPLES    OF   COMMERCE.  11 

lijs  place,  and  renders  assistance.  Almost  from  the  time  when  the  seed 
is  sown,  the  mine  opened,  the  trees  felled,  the  fishing  fleet  sails,  and  all 
througli  the  journeys  taken,  either  by  raw  materials  or  finished  products, 
to  their  destination,  the  aid  of  the  hanker  is  required  and  rendered. 

Co-OrEPATION   OF  THE   BaNKER  IN  THE   CARRYING  ON   OF   TrADE. 

Throughout  the  whole  processes  of  trade,  the  banker  co-operates  by 
supplying  money  to  those  who  carry  it  on  and  also  by  transporting  money, 
from  place  to  place,  as  needed. 

The  bankers  who  take  part  in  the  work  are  of  various  grades.  Some 
of  them,  indeed,  take  only  a  small  part:  passing  it  on  to  others  of  a  larger 
calibre  and  with  wider  connections.  The  largest  class  bankers  not  only 
supply  money  at  first  hand  to  the  men  who  purchase  the  products  of  the 
planter  and  the  farmers,  but  they  also  open  credits  for  the  lumberer  and 
the  foreign  merchant,  give  cash  for  the  bills  drawn  by  the  exporter  on 
foreign  correspondents,  lend  money  to  the  importer  to  pay  customs  duties 
and  finally  assist  in  the  distribution  of  finished  products,  by  discounting 
the  notes  given  to  him  by  his  customers. 

What  are  the  methods  and  principles  under  which  all  this  is  done; 
which  of  them  are  sound,  which  of  them  conduce  to  success,  and  which 
lead  to  failure  or  disaster,  will  lie  fully  opened  up  in  subsequent  papers. 


CHAPTER   III. 

FURTHER  PRINCIPLES  OF  BANKING,  AND  DEVELOPMENT 
OF  PRIVATE  BANKING  IN  ENGLAND. 

Origin  and  Meaning  or  the  Word  "Bank" — The  Delegation  of  a 
Banker's  Powers — DevelopiMent  of  Private  Banking  in  England 
— Considerations  Governing  Private  Banking. 

A  BANKER  who  has  opened  an  office  for  business  will  not  have  pro- 
ceeded far  before  perceiving  that  his  occupation  is  a  far  more  ex- 
acting one  than  that  of  a  capitalist  or  money-lender.  The  obliga- 
tion to  pay  variable  sums  of  money  on  demand  involves  another  obligation, 
viz.,  that  he,  or  some  one  acting  for  him,  shall  always  be  on  the  spot  to 
answer  the  demand  made.  If  the  banker,  before  entering  upon  the  busi- 
ness of  banking,  properly  so  called,  has  been  in  the  habit  of  lending 
money,  and  has  become  known  as  a  money-lender,  he  will  have  had  appli- 
cations in  abundance,  but  he  would  be  under  no  obligation  to  be  on  the 
spot  to  answer  them.  He  could  intermit  his  business  to  pursue  other 
engagements,  yet  no  one  would  have  ground  of  complaint  against  him. 
Herein  is  precisely  the  point  of  difference  between  a  money-lender  and  a 
banker — a  difference  that  is  frequently  not  w-ell  understood,  and  the  fail- 
ure to  understand  Avhich  has  led  to  confusion  both  in  thinking  and  irr 
writing. 

Origin  and  Meaning  of  the  Word  "Bank." 

It  is  of  the  essence  of  a  banker's  business  that  he  shall  be  in  a  posi- 
tion, at  all  times,  to  pay  money  on  demand  to  those  who  have  the  right  to 
demand  it.  This  necessity  is  the  reason  why  a  banker  finds  it  necessary 
to  have  what  is  universally  known  as  a  counter;  an  elevated  table,  in  fact,^ 
of  proper  height  for  convenience  of  counting.  If  we  pursue  the  idea  we 
shall  arrive  at  the  genesis  of  the  word  bank  in  English,  or  banco  in  Italian,, 
as  applied  to  money  matters.^ 

But  there  is  a  further  idea  connected  with  this  word.  The  word  in^ 
common  usage  is  invariably  connected  with  the  idea  of  protection — pro- 
tection, for  example,  against  floods,  as  are  the  levees  of  the  Mississippi, 
or  against  the  tides,  as  in  Holland  and  Nova  Scotia.  And  the  idea  of 
protection  is  strictly  applicable  to  a  banker's  counting-table  or  counter,. 

7  The  word  bank  in  its  original  meaning,  as  is  well  known,  indicates  nothing 
but  a  raised  platform,  generally  of  earth,  behind  or  before  which  persons  can  stand. 
The  word  thus  came  to  be  applied  to  the  elevated  table,  or  platfoim,  behind  which 
the  banker,  or  his  substitute,  stood  to  receive  or  pay  money.  This  elevated  table 
is  the  real  "bank,"  and  the  person  who  stands  behind  it  is  a  banker  or  his  rep- 
resentative. 

12 


FURTHER    PRINCIPLES    OF    BANKING.  13 

-so  made,  ex  necessita,  as  to  protect  the  banker  himself.  For  the  purpose 
of  mere  counting,  a  table  in  llie  middle  of  a  room  would  answer.  But  a 
banker  must  have  a  store  of  money  beside  him,  and  finding  it  necessary 
to  protect  that  store,  needs  to  arrange  his  counting-table  so  he  can  stand 
behind  it,  and  do  business  in  security.  Indeed,  it  is  customary  on  this 
side  of  the  Atlantic,  as  every  customer  of  a  bank  knows,  to  protect  the 
counter  itself  by  screens. 

In  conducting  the  business  of  banking,  it  is  necessary  to  fix  certain 
hours  when  demands  for  money  can  legally  be  made.  As  to  these  hours, 
a  private  banker  can  fix  them  for  himself;  in  which  case  his  customers, 
or  the  public,  being  duly  notified,  will  be  debarred  from  making  legal 
demands  at  any  other  time.  This  is  part  of  his  contract  with  them.  But 
usually,  as  the  business  of  banking  is  developed,  the  hours  of  business 
become  settled  by  custom,  to  which  all  conform  for  the  sake  of  conveni- 
ence. If  the  bank  is  a  corporation  its  hours  of  business  are  usually  stated 
in  its  by-laws,  and  advertised,  especially  in  country  districts,  where  per- 
sons have  to  travel  far  at  times  to  reach  the  banker  at  all.  The  only  way 
in  wliieli.  as  a  rule,  the  law  intervenes,  is  to  declare  what  days  shall  be 
considered  as  IwUdoys  on  which  no  demand  can  be  made  at  all. 

The  Delegation  of  a  Banker's  Powers. 

The  necessity  of  being  always  present  to  answer  demands  soon  im- 
poses on  the  banker  a  serious  question,  viz.,  to  whom  can  he  delegate  the 
power  to  answer  demands  in  his  absence.''  For  absent,  at  times,  he  must 
be.  Even  if  he  can  trust  a  clerk  to  answer  the  demands  of  depositors 
from  hour  to  hour,  the  safe  custody  of  his  stock  of  money  or  securities 
is  a  matter  of  the  first  consequence,  demanding  the  attention  of  more 
than  one  person.  But  even  the  function  of  lending  money  cannot  be 
intermitted  by  a  banker,  as  it  can  by  a  mere  money-lender.  With  his 
open  door  and  open  counter,  he  must  be  prepared  either  in  person  or  by 
<deputy  to  answer  the  demands  of  borrowers  as  well  as  of  depositors. 
The  commercial  customers  of  a  })ank  have  obligations  of  their  own  to 
meet  day  by  day,  and  in  these  days  dejiend  upon  arrangements  with  their 
bankers  to  enable  them  to  meet  these  requirements.  It  is  therefore  neces- 
sary for  a  banker  to  have  some  person  in  his  office  whom  he  can  trust  to 
exercise  this  function  of  lending  money  in  liis  absence.  But  what  posi- 
tion is  such  a  person  to  occupy? 

This  question,  in  former  years,  was  repeatedly  asked  by  the  bankers 
of  England,  and  it  was  generally  and  finally  answered  the  same  way. 
When  such  a  ])erson  was  found,  and  he  was  generally  some  clerk  or  officer 
of  their  own,  whose  qualities  of  shrewdness  and  sound  judgment  had 
been  observed  in  course  of  business,  he  was  at  first  entrusted  with  power 
of  attorney  and  placed  in  the  position  of  managing  clerk. 

But  it  would  soon  occur  to  a  shrewd  banker,  that  such  an  officer  might 
build  up  an  interest  and  connection  of  his  own,  which  interest,  so  long  as 
there  was  no  closer  connection  between  them  than  employer  and  employed, 


14  BANKING    AND    COMMERCE. 

might  in  time  become  something  distinct  from  liis  own.  It  might,  in  fact^ 
be  used  to  his  disadvantage  and  loss.  This  would  naturally  lead  to  the 
consideration  whether  it  was  not  desirable  to  bind  such  a  capable  officer 
to  himself  by  taking  him  into  partnership.  By  this  means  all  thoughts 
of  rivalry,  or  separate  interest,  would  be  banished,  and  such  a  close  iden- 
tity be  established  that  tlie  banker  and  his  confidential  officer  would  no 
longer  be  two  persons,  but,  for  all  banking  purposes,  only  one. 

Development   of    Private    Banking   in   England. 

Through  this  process  of  what  may  be  called  banking  evolution,  nearly 
all  the  great  banking  firms  of  England  have  passed.  The  clever  and 
shrewd  accountant  has  been  promoted  to  the  management  of  the  office^ 
taken  into  partnership,  accumulated  wealth,  and  has  finally  become  the 
head  and  principal  of  the  concern  which  he  once  served.  And  his  name, 
once  jitterly  unknown,  is  now  in  a  prominent  place  in  the  firm's  title,  and 
figures  in  banking  and  commercial  directories  so  prominently  as  to  be 
known  all  over  England. 

It  is  thus,  probably,  that  the  banking  firms  of  England  came  to  have 
such  long  titles  as  many  of  them  had  until  modern  developments  set  in. 
Thus,  for  example,  it  Avas  with  Barclay,  Bevan,  Triton,  Trells  &  Co.,  Glyn 
Mills,  Halifax  &  Co.,  Williams,  Deacon,  Labouchere  &  Co.,  Smith,  Payne 
&  Smiths,  and  other  firms  of  like  character.  And  so  great  a  weight  did 
the  more  prominent  of  these  names  carry,  that  they  have  been  generally 
retained  in  the  corporate  name  of  the  joint-stock  company  into  which  they 
have  been  merged.** 

But  in  the. serious  step  of  taking  in  a  partner,  either  a  merchant  or  a 
banker  will  have  regard  to  many  circumstances.  Perfect  honesty  and 
reliability  are  the  primary  considerations;  after  that  come  business  knowl- 
edge, prudence  and  industr}^,  and  a  due  measure  of  caution  and  enter- 
prise. Along  with  all  these  a  merchant  who  consults  his  own  comfort 
will  take  care  to  have  a  man  of  reasonably  good  temper  and  common 
sense  about  him.  A  quarrelsome,  cross-grained  man,  one  who  cannot  give 
and  take,  a  man  so  conceited  that  he  cannot  fancy  any  other  person  knows 
anything,  no  matter  how  clever  he  may  be,  should  be  left  to  plow  his 
own  furrow,  but  never  entrusted  with  a  partnership. 

In  a  business  like  banking,  where  the  interests  of  so  many  persons 
depend  on  a  successful  continuance  of  the  business,  it  is  of  the  first  im- 
portance to  provide  for  the  future.     The  business  of  a  bank  carried  on  by 

8  Most  of  this  has  as  close  an  application  to  commercial  partnerships  as  to 
partnership  in  banking.  It  Is  well  known  that  many  of  the  men  who  are  now 
heads  of  great  commercial  firms  commenced  their  career  in  the  "house"  as  clerks. 
While  doing  their  own  special  work  faithfully,  they  displayed  ability  for  some- 
thing beyond  it — ability  not  only  for  keeping  books,  but  for  suggesting  improve- 
ments; capacity  not  only  as  salesmen,  but  shrewdness  in  discriminating  between 
customers;  ability  not  only  to  handle  goods,  but  capacity  for  understanding  what 
goods  would  suit  the  customers.  They  displayed,  in  fact,  that  quality  that  Is  so 
difficult  to  define,   but  so  well   understood,   viz.,   business  ability. 


FURTHER    PRINCIPLES    OF    BANKING.  15 

private  individuals  might,  in  the  absence  of  such  arrangements,  be  brought 
to  an  entire  stop  by  the  death  or  withdrawal  of  a  single  partner.  Such 
a  stoppage,  in  certain  cases,  might  throw  the  business  of' a  whole  district 
into  confusion.  Tliese  contingencies  in  former  days  were  necessarily  pro- 
vided for  by  arrangements  between  the  partners  themselves,  and  tlie  best 
legal  skill  in  England  was  drawn  upon  to  prepare  deeds  that  would  ensure 
a  continuance  of  business.  That  this  has  been  successfully  done  is  sho^Vll 
by  the  recoid  of  banking  firms  that  have  had  an  unbroken  career  for 
upwards  of  two  centuries,  and  are  in  vigorous  life  at  this  day.  In  such 
arrangements  none  are  so  much  interested  as  junior  partners,  for  they, 
obviously,  have  most  to  fear  from  an  interruption  of  the  business. 

Private  banking  on  this  continent  has  never  occupied  the  high  position 
it  attained  in  England.  The  reason  for  the  extraordinary  development 
of  banking  by  private  firms  in  England  was  the  jealously-guarded  monop- 
oly of  the  Bank  of  England.  In  the  United  States,  however,  and  in  Can- 
ada, as  in  Scotland,  the  development  of  banking  by  joint-stock  compa- 
nies has  always  been  unrestricted  by  monopoly;  and  even  the  very  ap- 
pearance of  it,  in  the  case  of  the  United  States  Bank,  was  ruthlessly 
stamped  out  by  a  Democratic  President. 

But  though  the  banking  business  of  towns  and  cities  on  this  continent 
has  been  almost  wholly  conducted  by  joint-stock  companies,  a  consider- 
able sphere  has  existed  (at  any  rate,  until  late  years)  for  the  operations 
of  private  banking  in  the  thriving  villages  and  smaller  towns  of  the 
country. 

The  humorous  story  of  David  Harura,  which,  as  is  well  known,  was 
written  by  a  bank  officer,  probably  gives  a  fair  picture  of  the  kind  of 
persons  that  many  of  them  were,  and  the  kind  of  business  they  did,  in  the 
village  communities  of  the  United  States. 

Private  banking  at  one  time  had  obtained  a  considerable  development 
in  Canada,  and  that  for  a  good  reason  in  the  circumstances  of  the  coun- 
try, largely  agricultural  as  the  Provinces  of  Canada  are,  the  towns  and 
cities  generally  at  considerable  distances  from  each  other,  and  between 
thena  having  grown  up  villages  of  fair  population,  in  which  are  to  be 
found  some  of  the  features  of  town  life.  Such  villages  did  not  at  one  time 
afford  sufficient  business  to  make  it  profitable  for  joint-stock  banks  to  be 
established  in  them,  for  their  methods  and  machinery  are  costlj',  and  it  is 
contrary  to  law  for  them  to  undertake  any  other  business.  But  where  a 
joint-stock  bank  would  scarcely  pay  expenses,  a  private  banker  might 
make  a  respectable  living;  for  in  addition  to  banking  he  could  undertake, 
for  example,  to  effect  insurances,  both  fire  and  life.  He  could  assist  in 
drawing  up  the  simpler  kinds  of  legal  instruments,  and  do  the  same  busi- 
ness as  is  done  by  professional  accountants.  This  state  of  thing,  how- 
ever, is  gradually  passing  away.  By  the  development  of  the  country, 
many  former  villages  are  becoming  towns,  and  are  affording  sufficient 
business  to  enable  one  or  more  branches  of  joint-stock  banks  to  be  estab- 
lished in  them.     Even  in  this  case,  however,  a  private  banking  firm  may 


16  BANKING    AND    COMMERCE. 

maintain  its  position,  if  its  partners  are  known  to  have  undoubted  means, 
and  have  so  conducted  the  business  as  to  gain  and  keep  the  confidence 
of  tlie  community. 

CoXSIDERATIONS    GOVERNING    PrIVATE     BaNKING. 

Before  entering  on  the  hirger  class  of  questions  that  appertain  to 
joint-stock  banking,  it  may  be  well  to  note  briefly  the  considerations  that 
should  govern  a  private  banker  in  the  conduct  of  his  business: 

(1)  He  should  certainly  not  carry  on  any  mercantile  business,  for  in 
so  doing  he  might  be  in  competition  with  his  own  customers. 

(2)  He   should  undoubtedlj'  be   possessed   of   a   sufficient   amount   of 

CAPITAL. 

Every  private  banker,  in  the  nature  of  things,  should  have  a  fund  out 
of  which  he  can  meet  the  losses  which  are  incidental  to  the  lending  of 
money.  For  if  he  cannot  meet  them  out  of  his  capital,  he  must  draw 
upon  the  money  of  his  depositors  for  the  purpose,  to  their  loss. 

It  must  be  remembered  that  the  customers  of  a  private  banker  are 
almost  invariably  persons  of  small  means,  who  have  deposited  money 
with  him  which  they  cannot  afford  to  lose.  A  village  community,  as  a 
rule,  is  not  distressed  or  embarrassed  by  the  failure  of  one  of  its  store- 
keepers; but  it  may  be  very  seriously  distressed,  and  the  distress  will 
probably  extend  to  the  farming  community  round  about,  if  a  private 
banker  cannot  repay  the  sums  deposited  with  him. 

There  is,  however,  this  to  be  said,  that  a  private  banker  can  take 
securities  for  his  loans  that  are  prohibited  to  a  chartered  bank  and  so 
keep  himself  safe. 

(3)  A  private  banker  must  beware  of  getting  his  money  "locked  up," 
and  will  need  to  calculate  carefully  the  length  of  time  which  borrowers 
require  so  as  to  be  sure  of  having  sufficient  money  in  his  office,  or  at  com- 
mand, to  meet  daih'  demands.  And  in  taking  fixed  deposits,  the  notice 
should  be  sufficiently  long  to  enable  him  to  make  arrangements  to  meet  a 
large  demand  without  embarrassment.  He  will,  of  course,  have  it  under- 
stood in  taking  deposits  of  more  than  an  average  amount  that  the  notice 
will  be  required,  as  a  matter  of  business. 

(4)  To  insure  all  this,  he  must  keep  sufficient  reserves. 

There  are  private  bankers  in  Canada  who  have  continuously  fulfilled 
these  conditions,  and  maintained  a  prosperous  business. 

On  the  other  hand,  there  have  been  a  certain  number  of  failures 
amongst  this  class,  which  failures  have  been  almost  invariably  traceable 
to  want  of  sufficient  capital  to  begin  with,  coupled  with  a  disposition  to 
take  risks  which  a  cljartercd  bank  would  avoid. 


CHAPTER    ir. 

JOINT-STOCK  BANKING  IN  GENERAL. 

Canadian  Joint-Stock   Banks — The   Bank   of   England — Organiza- 
tion OF  Banks  in  the  United  States. 

THE  early  bankers  who  co-operated  in  the  movements  of  commerce,  in 
Europe,  apart  from  the  great  institutions  which  were  avowedly 
created  to  assist  the  Government,  were  largely,  as  has  been  seen, 
private  individuals  or  firms,  lint  since  the  extraordinary  opening  up  of 
countries  in  modern  times  and  the  vast  development  of  commerce  in  con- 
sequence, the  tendenc}'  has  increasingly  been  for  banking  to  be  carried 
on  by  incorporated  companies. 

Banking,  therefore,  in  all  its  important  spheres,  is  thus  carried  on; 
and  it  has  been  evident  that  the  principal  motive  for  giving  powers  to 
banks  in  a  corporate  form  is  tliat  they  might  efficiently  co-operate  in  the 
promotion  of  commerce. 

A  joint-stock  bank  with  its  headquarters  in  China  and  its  agencies 
in  England,  the  United  States,  and  Japan,  takes  an  influential  part  in 
the  movements  of  the  Eastern  trade  of  those  countries.  Similarly,  an 
Indian  bank  having  its  headquarters  in  London  covers  the  whole  of  our 
Indian  Empire  with  its  operations  and  takes  part  in  the  movements,  both 
outward  and  inward,  of  the  commerce  of  Australia  and  New  Zealand. 
These  are  simple  facts. 

Canadian  Joint-Stock  Banks. 

The  principal  banking  corporation  of  Canada  covers  the  whole  Do- 
minion from  the  Atlantic  to  the  Pacific  with  its  branches,  and  there  is 
scarcely  an  operation  of  manufacture  or  conunerce  therein  which  that 
institution  does  not  assist  in  developing.  But  the  commerce  of  Canada 
has  an  intimate  connection  with  England  and  the  United  States.  This 
bank  therefore  has  offices  in  London,  New  York  and  Chicago,  and  assists 
in  carrying  on  the  larger  operations  of  trade  in  all  these  cities. 

The  same  may  be  said  of  other  Canadian  banks  whose  operations 
cover  an  immense  extent  of  territory  in  the  United  States  as  well  as  in 
Canada,  from  New  Orleans  to  the  Yukon,  and  enable  them  to  co-operate 
in  the  movements  of  commerce  from  its  smallest  beginnings  in  the  opera- 
tions of  a  country  trader,  to  those  vast  developments  by  wliich  the  pro- 
ductions of  whole  countries  are  massed  for  shipment  in  great  ports  and 
sent  across  the  ocean  to  the  remotest  parts  of  the  world.  It  is  evident, 
however,  that  banks  covering  so  wide  a  field  must  of  necessity  have  a 
corporate  form.  No  private  firm,  however  wealthy,  could  possibly  carry 
2  17 


18  RANKING    AND    COMMERCE. 

on  business  in  so  many  diversified  forms,  in  such  diverse  conditions,  and 
covering  such  vast  spheres  of  operation  as  are  covered  by  some  modern 
banks.     Incorporation  therefore  was  a  necessity. 

Thk  Bank  of  England. 

It  has  been  already  pointed  out  that  the  continuity  of  a  banking  firm 
is  a  most  essential  feature  of  the  business.  So  many  interests  depend 
upon  it,  that  all  modern  countries  have  sought  by  legislation  to  provide 
that,  so  far  as  possible,  they  shall  not  be  subject  to  the  changes  of  time 
and  chance.  In  Scotland  the  greater  part  of  the  business  of  banking  has 
been  carried  on  for  two  hundred  3'ears  by  corporations  organized  directly 
or  indirectly  by  acts  of  Parliament.  And  banking  would  doubtless  have 
had  the  same  development  in  England,  but  for  the  fact  that  up  to  a  cer- 
tain period  the  Bank  of  England  was  by  long  tradition  extremely  jeal- 
ous of  banking  being  carried  on  by  corporations.  That  great  corpora- 
tion, while  willing  to  tolerate  what  it  could  not  prevent,  viz.,  the  forma- 
tion of  private  banking  partnerships,  would  never  tolerate  the  formation 
of  bankmg  corporations  created  by  act  of  Parliament. 

The  idea  of  the  Bank  of  England  was  that  all  other  banks  in  England 
should  be  tributaries  to  itself,  revolving  round  it  as  lesser  lights  revolve 
around  the  sun.  They  should  keep  an  account  with  it,  deposit  with  it  all 
their  spare  funds,  keep  their  cash  reserves  in  its  hands,  and  in  case  of 
need  rely  upon  it  for  assistance  by  rediscounting  or  by  secured  advances. 

The  Bank  of  England  was  thus  to  be  the  Banker's  Bank;  and  any 
coming  into  touch  on  its  part  with  the  commerce  and  trade  of  the  coun- 
try was  to  be  througli  the  medium  of  other  bankers.  There  was  no  ex- 
press law  to  this  effect,  but  the  unwritten  custom  gradually  grew  up,  and 
so  potent  was  its  force  that  in  time  it  became  fixed  and  universal.  Even 
aff.er  the  force  of  public  opinion  became  potent  enough  (as  it  did  after 
the  crash  amongst  the  {private  banking  interest  in  1825)  to  break  down  the 
opposition  of  the  Bank  to  the  establishment  of  banking  corporations,  the 
force  of  this  tradition  prevailed.  To  this  day  the  Bank  of  England  is 
largely  the  banker's  bank.  All  the  banks  in  the  country  keep  an  account 
with  some  bank  in  London,  or  with  the  Bank  of  England  direct,  and  all 
London  banks  keep  an  account  with  the  Bank  of  England,  and  commit 
to  its  keeping  their  reserves  of  cash.  Such  great  banks  as  the  National 
Provincial  Bank  of  England,  with  its  200  branches  and  50,000,000  ster- 
ling of  deposits ;  or  the  London  and  County,  with  its  deposits  of  4 1,000,- 
000  sterling,  not  to  mention  other  great  corporations  in  London,  Man- 
chester, Liverpool  and  other  centres,  besides  every  bank  in  Scotland  and 
Ireland,  all  acknowledge  the  supremacy  of  the  great  central  institution 
by  keeping  accounts  with  it,  and  lodging  with  it  their  spare  funds. 

It  might  be  thouglit  tliat  M'hcn  power  was  given  by  Parliament  to  es- 
tablish banking  corporations,  the  Legislature  would  endeavor  to  have 
them  modelled  upon  tlie  pattern  of  the  Bank  of  England.  That  great 
corporation    had   demonstrated   the   wisdom   of   its   constitution   by   a   re- 


JOINT-STOCK   BANKINC.    IN   GENERAL.  19 

markablo  course  of  what  was,  on  the  wliolo,  good  management.  During 
all  the  vicissitudes  of  English  history  from  the  Revolution  of  I688  to  the 
time  then  present,  it  had  maintained  its  ])osition,  and  rendered  ines- 
timable service  to  the  State.  But  the  Bank  of  England  was  not  taken 
as  a  model ;  and  that  for  good  reasons.  The  Bank  had  one  distinguish- 
ing power  which  marked  it  off  from  all  other  banking  concerns  in  the 
kingdom.  It  had  tlie  ]K)wer  of  issuing  notes  which  were  created  legal 
TENDER  b}'  law. 

There  was  at  that  time  nothing  to  prevent  private  bankers  from  issu- 
ing notes  to  any  extent  they  pleased.  They  were  not  empowered  to  do 
it  by  law;  neither  did  the  law  pit^vent  them,  the  only  condition  imposed  by 
law  was  that  no  note-issuing  bank  should  carry  on  business  within  sixty 
miles  of  London.  But  none  of  their  notes  were  legal  tender,  consequent- 
ly their  circulation  was  almost  wholly  confined  to  the  district  in  which 
they  were  issued.  But  the  notes  of  the  Bank  of  England  being  legal 
tender,  circulated,  and  were  intended  to  circulate,  all  over  England,  and 
were  a  legal  tender  everywhere  except  at  the  Bank  itself.''  But  they  were 
never  legal  tender  in  Scotland. 

There  was  another  reason  why  the  charter  of  the  Bank  of  England 
could  not  be  followed  in  framing  laws  for  other  joint-stock  banks.  It  was 
a  part  of  its  original  constitution,  and  that  feature  of  it  has  subsisted 
ever  since,  that  the  whole  of  its  capital  should  be  loaned  to  the  Govern- 
ment. It  was  founded  to  assist  the  Government  in  the  difficult  days  of 
the  Revolution  of  lt)88,  and  it  has  retained  this  essential  feature  to  this 
day.  Although  its  capital  has  been  increased  more  than  tenfold  since  its 
foundation,  there  has  never  been  a  time,  down  to  the  present  hour,  when 
the  whole  of  it  failed  to  be  loaned  to  the  Government  of  the  day.  And 
further,  it  has  always  been  understood  that  the  Government  has  had  the 
first  claim  to  any  resources  that  the  Bank  might  possess.  This  has  never 
been  embodied  in  legislation,  but  it  is  one  of  those  traditions  that  have 
been  so  long  in  operation  as  to  have  acquired  the  force  of  law.'" 

9  It  must  not  be  supposed,  however,  that  the  Government  of  England  was 
responsible  for  the  notes.  It  is  a  common  mistake  to  suppose  that  it  was.  The 
Government  of  England  never  issued  circulating  notes  as  the  Government  of  Can- 
ada and  the  Government  of  the  United  States  have  done.  The  Government  of 
England,  though  it  did  interfere  occasionally  in  times  of  pressure  to  assist  the 
Bank,  was  careful  to  guard  itself  from  being  responsible  for  the  notes.  All  that 
it  ever  did  was  to  relax  some  one  or  other  of  the  restrictions  under  which  notes 
were  issued.  But  no  noteholder  or  other  creditor  of  the  Bank  was  ever  allowed 
to  imagine  that  he  could  go  to  the  Treasury  and  make  a  legal  demand  there. 

10  The  same  principle  of  the  whole  of  the  capital  of  the  bank  being  lent  to 
the  Government  lies  at  the  foundation  of  the  National  banking  system  of  the 
United  States.  This  system,  like  that  of  the  Bank  of  England,  took  its  rise  from 
the  necessities  of  the  Government.  Its  founder  had  primarily  in  view  not  the 
establishment  of  sound  banks,  or  of  a  secure  circulation,  but  the  obtaining  of 
money  to  carry  on  the  war.  And  it  fully  answered  its  purpose.  Almost  the  whole 
banking  capital  of  the  country  was  loaned  to  the  Government  in  the  shape  of  the 
holding  of  Government  securities.  And  not  only  was  the  operation  in  the  early 
days  of  the  war  highly  profitable  ,to  the  banks,  but  a  currency  was  secured  whose 
safety  has  never  been  questioned.  But  in  the  change  of  times  and  circumstances 
very  grave  defects  have  been  developed  in  this  system  which  will  be  noticed  later 


20  BANKING    AND    COMMERCE. 

The  charter  of  the  Bank  of  England,  which  charter  is  simply  an  act 
of  Parliament  embodying  its  constitution,  has  therefore  never  been  adopt- 
ed as  a  model  for  other  banks  in  England.  In  fact,  the  joint-stock  banks 
of  England  have  never  been  governed  by  the  provisions  of  a  general  act 
as  have  the  banks  of  Canada  and  the  United  States.  Apart  from  the 
necessity  of  making  a  declaration  as  to  the  amount  of  their  proposed 
capital,  the  names  of  their  original  directors  and  stockholders  and  most 
particularly  the  name  of  the  officer  in  whose  name  the  corporation  can 
sue  and  be  sued,  they  are  at  liberty  to  carry  on  their  business  in  any  way 
that  stockholders  and  directors  may  deem  advisable.  The  one  important 
restriction  to  which  they  are  subject  is  in  the  amount  of  their  circulation. 

Since  the  passing  of  the  celebrated  Banking  Act  of  Sir  Robert  Peel  in 
1844,  every  bank  in  England,  whether  private  or  joint-stock,  has  been 
obliged  to  restrict  its  issue  within  the  amount  of  its  average  issue  for  the 
three  years  previous  to  1844.  This  amount  has  been  registered,  and  ap- 
pears in  every  published  statement  of  the  note  issues  of  English  banks. 
The  banks  of  Scotland  made  a  strenuous  resistance  to  the  restriction  be- 
ing applied  to  them;  and  succeeded  so  far  as  this,  that  they  were  allowed 
to  exceed  this  limit  on  condition  that  they  should  hold  gold  for  the  excess 
— an  academic  rule,  devised  by  legislators  of  little  banking  experience. 
But  the  liberty  they  obtained  to  pass  beyond  the  average  of  circulation 
of  half  a  century  ago  has  proved  to  be  most  profitable  to  the  banks  and 
advantageous  to  the  country. 

Organization  of  Banks  in  thk  United  States. 

The  organization  of  banks  in  the  United  States  has  passed  through 
various  stages,  and  is  complicated  by  the  fact  that  it  has  been  dealt  with 
by  both  State  and  Federal  legislation^  To  attempt  even  a  brief  summary 
of  the  steps  by  which  the  banking  laws  of  the  United  States  have  reached 
their  present  development  would  be  beyond  the  scope  of  this  work.  Suf- 
fice to  say  that  after  an  attempt  made  many  years  ago  to  establish  a 
Bank  of  the  United  States  on  somewhat  similar  principles  to  that  of  the 
Bank  of  England,  which  project  failed  for  political  reasons,  numerous 
charters  were  granted  by  the  separate  States.  Many  of  these,  especially  in 
the  Eastern  cities,  were  well  considered,  and  framed  with  much  financial 
wisdom.  But  it  was  far  otherwise  in  some  of  the  States  of  the  West.  In 
these  newer  communities,  many  charters  were  granted  by  their  several 
States  in  a  manner  that  set  common  sense  at  defiance,  'lumbers  of  banks 
were  established  with  powers  to  issue  notes,  imder  the  foolish  idea  that 
by  this  means  money  Could  be  made  plentiful,  and  the  development  and 
prosperity  of  the  district  insured.  No  proper  provisions  were  made  for 
the  redemption  of  these  notes;  it  thus  came  about  tliat  masses  of  cur- 
rency were  set  afloat  which,  speedily  went  to  a  discount;  whilst  much  of  it 
ultimately  became  almost  as  valueless  as  the  Continental  currency  of  the 
Revolution.  This  "wild-cat"  currency  (as  it  was  named")  was  a  source 
of  untold  trouble  to  merchants  and  travelers,  from  the  fact  that  the  notes 


A- 

JOINT-STOCte I  BANKING   IN   GENERAL.  21 

oIl  nearly  every  Western  bank  had  a  different  value,  which  value  could 
only  be  ascertained  from  publications  issued  for  the  purpose.  These 
bank-note  reporters  were  a  necessary  part  of  the  furniture  of  every  busi- 
ness office,  and  were  even  necessary  to  householders,  lawyers  and  minis- 
ters; for  none  of  them  could  tell  what  was  the  real  value  of  the  bank 
bills  that  were  circulated,  without  consulting  one  of  these  records.  '  But  a 
step  Avas  at  length  taken  that  put  a  final  stop  to  all  such  bank  issues.  A 
great  exigency  had  arisen  under  which  the  interests  of  the  separate 
States  had  to  give  way.  It  was  during  the  first  years  of  the  great  Civil 
War  that  Mr.  Chase,  the  very  able  Secretary  of  the  Treasur}',  conceived 
the  idea  of  establishing,  not  one  great  bank  of  issue  like  the  Bank  of 
England,  but  numhers  of  banks  whose  whole  capital  should  be  lent  to 
the  Government;  and  who  should  have  the  right  of  issuing  notes  for  the 
amount  of  their  loan  which  would  be  held  as  security  therefor  (less  a 
percentage  reserved).  These  notes,  then,  would  be  indubitably  safe,  and 
could  be  received  without  question,  from  one  extremity  of  the  country  to 
the  other.  But  they  were  never  made  legal  tender.  The  system  was  no 
sooner  launched  than  it  proved  successful.  It  appealed  to  patriotic  feel- 
ing. Large  numbers  of  banks,  formerly  organized  under  State  laws, 
adopted  the  National  system.  And  under  it  an  immense  number  of  new 
banks  were  organized.  The  old  issues  of  State  banks,  under  the  opera- 
tion of  this  system  and  disabilities  imposed  by  it,  speedily  disappeared, 
and  the  notes  of  the  national  banks  became  universally  prevalent. 

Along  with  all  this,  a  system  of  Government  issues  was  devised  which 
were  made  legal  tender.  But  as  they  were  not  payable  in  gold,  which 
continued  at  a  premium  all  through  the  war,  they  commanded  no  more 
favor  than  the  notes  of  the  national  banks.  For  these  were  exchangeable 
for  Government  notes  at  any  time,  besides  which  they  were,  if  anything, 
safer.  The  notes  of  the  Government  rested  on  the  credit  of  the  Govern- 
ment alone,  while  those  of  the  banks  were  not  only  secured  by  Government 
bonds,  but  were  a  charge  upon  the  assets  of  the  several  banks. 

It  is  not  necessary  to  enter  further  on  the  subject  of  the  Government 
issues.  Our  concern  is  with  banking,  and  with  the  laws  of  the  United 
States  on  the  subject. 

It  must  not  be  imagined  that  when  the  National  banking  system  began 
to  prevail  so  extensively  it  drove  the  old  State  banks  out  of  existence.  By 
no  means.  The  State  banks  could,  under  their  respective  laws,  carry  on 
all  the  operations  of  banking  except  the  issue  of  notes.  Now,  for  banks 
in  large  cities,  the  power  to  issue  their  own  currency,  restricted  as  it  was 
to  a  lesser  amount  than  their  paid-up  capital,  and  accompanied  by  the 
obligation  to  hold  Government  bonds,  was  of  less  and  less  value  as  the 
bonds  yielded  a  lessening  rate  of  interest,  until  finally  it  became  of  scarce- 
ly any  value  at  all.  It  was,  and  it  is,  of  some  value  to  banks  in  smaller 
centres.  But  banks  in  the  large  cities,  and  especially  in  New  York,  could 
dispense  with  it  without  inconvenience,  and  work  under  State  charters,  on 
Iheir  own  credit  alone. 


CHAPTER    V. 

THE  INTERNAL  ECONOMY  OF  A  JOINT  STOCK  BANK. 

The  Two  ]\Jain  Departments — The  Teller — His  Qualifications — 
The  Ledger  Keeper — Discount  and  Loan  Department — The  Ac- 
countant— The  Branch  Manager. 

IN  every  banking  office,  be  it  large  or  small,  the  work  will  be  divided 
into  two  main  departments — the  handling  of  money  and  the  keeping 
of  accounts;  each  of  these,  in  a  large  office,  having  various  subdi- 
visions.     Above   and    beyond   these    is    the   department   of   management, 
whether  of  a  single  office,  or  the  whole  bank.     Let  us  consider  each  of 
these  in  order. 

The   Teller. 

The  first  persons  with  whom  a  banker  has  to  do  when  he  opens  an 
office  are  those  who  bring  money  to  deposit.  It  is  for  the  purpose  of 
receiving  them,  that  he  must  have  a  counter.  This  counter,  as  has  been 
shown,  is  the  original  bank,  behind  which  the  banker  or  his  officers  stand 
and  on  which  money  is  placed  to  be  counted.  Hence  its  name.  A  person 
who  stands  at  this  counter  ready  to  receive  or  pay  money  is  called  in  Eng- 
land a  cashier,  meaning  a  person  who  handles  cash.  In  Scotland,  the 
United  States,  and  Canada,  this  officer  is  called  a  teller,  or  a  person  who 
tells  or  cou7its  out  tlie  money  he  handles.  In  a  small  branch  the  manager 
himself  often  performs  this  office;  but  when  the  business  is  enlarged,  the 
work  must  be  delegated  to  another.  The  amount  passing  through  the 
hands  of  such  an  officer  in  the  course  of  a  day  is  very  large,  and  he  is  re- 
sponsible for  it  to  the  last  penny,  or  the  last  cent.  Such  a  man  must 
have  a  good  head  for  figures,  quickness  of  fingers,  be  able  to  count  rap- 
idly all  sorts  of  money,  and  also  to  make  rapid  calculations.  A  slow 
man,  no  matter  how  correctly  he  may  do  his  work,  will  never  answer  for 
this  post.  He  will  only  waste  the  time  of  customers,  and  irritate  them.  A 
good  teller  must  have  a  quick  eye,  so  as  to  be  able  to  tell  a  bad  coin  or 
a  forged  note  or  draft,  the  moment  he  sees  it.  An  expert  teller  will  come 
to  have  a  sort  of  instinct  about  such  things,  and  be  able  to  detect  a  bad 
coin  or  a  bad  bill,  or  raised  draft,  by  instant  eyesight.  Besides  this,  he 
must  be  able  to  keep  cool  on  busy  days,  and  learn  not  to  be  flurried  when 
many  are  waiting  about  the  counter,  or  are  unreasonable  in  their  require- 
ments, as  some  people  arc  at  times.* ^     If  he  does  get  flurried,  he  will  be 

11  In  some  English  banks  a  practice  prevails   of  providing  an   ante-room   and 

only  admitting  into   the   banking  office  as   many  persons  at  a   time  as   there   are 

tellers  to  wait  upon  them.     Thus  there  is  never  a  crowd  aVwut   the  counter,   and 

the  teller  has  only  one  person  to  attend  to  at  a  time.     To  carry  out  this  practice. 

22 


THE  I>:Tf:RNAL  ECONOMY  OF  A  JOINT  STOCK  BANK.    23 

sure  to  lose  money.  He  should  liave  a  large  development  of  civility;  if 
it  be  not  natural  to  him,  he  should  cultivate  it. 

A  good  teller,  besides  being  quick  and  cool,  will  also  be  observant; 
and  being  so,  may  notice  many  things  in  his  intercourse  with  customers 
and  the  public  which  are  worth  communicating  to  the  manager.  In  a 
large  bank  a  division  is  customarily  made  between  the  duties  of  those 
who  receive  money  and  those  who  pay  it  out.  In  both  of  these,  however, 
the  observant  mind,  the  quick  eye,  and  the  skilful  fingers  are  equally 
necessary. 

In  the  banks  of  the  United  States,  the  senior  teller  has  the  responsi- 
bility of  certifying  checks  to  be  good — a  difficult  function  to  perform,  as 
may  be  supposed,  seeing  that  the  teller  does  not  keep  the  accounts  him- 
self, and  must  trust  largely  to  his  memory.  This  officer  in  an  American 
bank  is  entrusted  with  a  certain  discretion  in  the  matter  of  certification. 
He  is  always  a  man  of  experience,  and  his  position  is  next  to  that  of 
Manager  or  Cashier. 

The  Ledger  Keeper. 

In  the  natural  order  of  things,  the  next  person  with  whom  a  bank 
customer  has  to  do,  is  the  person  who  keeps  the  ledger  containing  the 
customers'  accounts.  The  connection  between  him  and  the  teller  is  neces- 
sarily close,  and  it  is  important  that  the  money  paid  in  or  taken  out  by  a 
customer  should  be  speedily  entered,  so  that  on  a  busy  day  of  many 
transactions  the  account  may  be  accurately  stated  at  any  hour.  Otherwise, 
there  is  danger  of  a  check  being  refused  when  there  are  funds  to  meet  it, 
or  of  a  check  being  paid  after  all  the  funds  have  been  drawn  out.  The 
ledger  keeper,  like  the  teller,  must  be  both  accurate  and  quick;  but  above 
all  things  accurate,  as  a  mistake  in  the  keeping  of  a  customer's  account 
may  lead  to  an  actual  loss  of  uioney,  or  to  the  closing  of  the  account  itself. 
And  like  a  teller  he  must  have  a  quick  eye  to  observe,  for  upon  him  rests 
the  responsibility  of  discovering  forgeries.  To  this  officer  in  a  Canadian 
bank  all  checks  are  presented  to  be  "marked  good"  before  being  paid. 
But  there  is  a  difference  in  this  matter  between  the  custom  prevailing  in 
the  United  States  and  in  Canada.  The  ledger  keeper  in  Canada  before 
he  marks  a  check  good,  debits  the  customer's  accojint  with  it.  There  is 
thus  a  scientific  precision  about  the  process.  In  an  American  bank,  the 
check  is  simply  certified  to  be  good  without  the  customer's  account  being 
debited  with  it,  a  practice  which  seems  to  open  the  door  to  serious  abuse. 
This  custom  is  analogous  to  that  prevailing  in  many  English  banks.  It 
is  not  good  in  theory,  but  it  seems  to  work  well  in  practice. 

however,  different  arrangements  are  required  from  those  in  a  Canadian  bank, 
where  customers  have  direct  access  to  a  ledger  keeper  or  a  discount  or  collection 
clerk.  On  the  whole,  the  Canadian  arrangement  Is  preferable,  though  it  requires 
much  more  coolness  on  the  part  of  a  teller  than  the  other.  An  English  cashier 
or  Scotch  teller  almost  invariably  stands  at  an  open  countar.  On  this  side  the 
Atlantic,   he   is  protected  by  a   railing. 


-2t  BANKING    AND    COMMERCE. 

The  ledger  keeper,  like  the  teller,  if  observant,  may  notice  many 
things  in  the  working  of  accounts  that  are  worth  communicating  to  the 
manager,  especially  symptoms  of  exchanging  checks,  or  borrowing  sur- 
reptitiously from  another  bank.  He  can  also  form  an  opinion  as  to 
whether  a  customer  is  easy  financially  or  otherwise. 

The  DisrouNT  and  Loan  Department. 

In  this  important  ofFce  a  clerk  has  many  opportunities  of  displaying 
more  than  ordinary  intelligence  if  he  is  possessed  of  it.  To  a  discount 
clerk  is  committed  the  responsibility  of  seeing  that  the  bills  he  handles 
are  in  proper  legal  shape.  The  manager  considers  whether  or  not  the 
names  on  the  bills  are  satisfactory,  and  if  they  ought  to  be  discounted. 
But  the  discount  clerk  examines  every  bill  to  see  that  there  has  been  no 
material  alteration  in  it,  that  it  is  not  dated  on  Sunday,  that  the  signature 
and  endorsement  are  in  proper  order,  that  it  is  complete,  and  not  defec- 
tive. He  will  also  notice  any  peculiarity  in  the  signature  or  endorsement 
which  would  lead  to  a  suspicion  of  fraud.  A  good  discount  clerk  will 
notice  how  the  account  of  a  customer  is  working,  whether  favorably  or 
otherwise,  also  whether  renewals  are  frequent,  and  certain  lines  of  paper 
tend  to  become  chronic. 

In  the  case  of  loans  he  will  be  expected  to  scrutinize  the  security,  and 
to  see  that  such  documents  as  warehouse  receipts,  bills  of  lading,  policies 
of  insurance,  etc.,  are  in  proper  order.  Loans  on  bonds  and  stocks,  where 
the  business  is  large,  are  generally  under  charge  of  a  special  clerk.  His 
duties  will  be  very  similar  to  those  of  a  discount  clerk.  Here  again  an 
observant  clerk  will  notice  much,  in  the  actual  handling  of  the  business, 
which  would  be  of  interest  to  a  manager  to  know. 

The  duties  of  a  collection  clerh  are  of  much  the  same  character  as  a 
discount  clerk,  and  call  for  no  special  remark.  The  same  may  be  said 
of  the  exchange  clerk.  He  deals  with  foreign  bills  as  a  discount  clerk 
does  with  inland  ones.  And  while  a  manager  determines  whether  the 
bills  are  to  be  bought  or  not,  and  fixes  the  rate,  the  exchange  clerk  will 
see  whether  they  are  drawn  in  accordance  with  law,  and  whether  the  doc- 
uments of  security  are  in  proper  form. 

The  Accountant. 

The  highest  officer  in  the  ordinary  working  of  a  bank,  and  coming 
immediately  next  to  the  manager,  is  the  accountant.  He  keeps  himself, 
or  causes  to  be  kept,  the  important  book  called  the  general  ledger  in 
which  the  leading  departments  of  the  office  are  summarized.  It  is  by  an 
accurate  keeping  of  this  book  that  the  manager  is  made  acquainted  with 
the  amount  of  the  deposits,  discounts,  and  cash,  day  by  day,  together  with 
balances  due  from  one  or  to  other  banks  or  agencies.  It  is  by  information 
gathered  from  this  book  that  he  guides  his  course,  very  much  as  a  navi- 
gator guides  his  ship.     Summaries  of  the  principal  accounts  are  also  laid 


THE  INTERNAL  ECONOMY  OF  A  JOINT  STOCK  BANK.  25 

before  the  meetings  of  the  Board  and  form  the  foundation  of  statements 
to  be  made  to  the  Government.  As  a  matter  of  mere  bookkeeping  this 
ledger  is  not  difficult  to  keep.  But  to  keep  it  accurately  is  of  the  highest 
possible  importance,  for  it  is  a  check  upon  and  a  key  to  all  the  other 
books  of  the  bank.  There  is  another  book  of  high  importance  which 
should  be  kept  by  the  accountant,  or  his  assistant,  viz.,  what  is  generally 
known  os  the  liability  ledger.  In  this  book  an  account  is  opened  with 
every  discounting  or  borrowing  customer,  which  account  is  debited  with 
every  bill  discounted,  and  credited  with  every  bill  paid.  The  account 
shows  whether  a  customer  is  keeping  within  the  line  allotted  to  him  by  the 
Board,  and  also,  what  is  of  the  highest  importance,  how  much  of  each 
man's  name  (or  each  stock  in  case  of  stock  loans)  every  customer  has 
under  discount.  This  book  should  be  kept  rather  by  the  accountant  than 
by  the  discount  clerk.  Its  contents  should  be  so  familiar  to  the  manager, 
by  examanation  or  by  summaries,  that  he  may  be  said  practically  to  know 
it  off  by  heart.  The  accountant  should  always  be  a  man  who  has  passed 
through  the  grades  and  understands  the  work  of  every  other  clerk  in 
the  bank.  He  has  a  supervisory  control  of  the  other  clerks,  and  is  respon- 
sible for  the  discipline  of  the  office.  He  is  able  to  instruct  clerks  in  their 
duties,  and  to  advise  them  in  case  of  difficulty.  He  naturally  takes  the 
manager's  place  in  case  of  absence  and  is  looked  upon  as  eligible  for  pro- 
motion to  a  managership,  should  he  display  managing  qualities  when 
placed  temporarily  in  charge. 

But  here  must  be  inserted  an  important  proviso.  It  is  not  every  good 
bank  officer  who  is  fit  to  be  a  manager.  A  man  may  be  a  first-rate  teller, 
or  even  a  llrst-class  accountant,  and  vet  not  have  the  qualities  that  would 
make  him  a  successful  manager.  What  these  qualities  are  will  appear 
later  on;  meanwhile,  the  foregoing  will  give  a  general  idea  of  the  leading 
divisions  of  work  in  a  banking  office.  But  they  are  susceptible  of  varia- 
tions according  to  circumstances,  and  there  must  be  many  subdivisions, 
as  the  office  increases  in  size.  In  the  smaller  branches,  of  which  many 
exist  in  Great  Britain  and  the  Colonies,  the  whole  of  the  above  duties  Avill 
be  performed  by  two,  three,  or  four  men,  of  whom  the  manager  is  one. 
But  as  a  branch,  or  individual  bank  as  in  the  United  States,  increases  in 
size,  it  is  necessary  to  arrange  matters  so  that  the  manager  shall  have  less 
and  less  time  occupied  with  the  routine  work  of  the  office,  so  as  to  con- 
centrate his  attention  upon  its  discounts  and  loans  and  keeping  a  proper 
supply  of  money.  Far  better  to  have  an  extra  clerk  employed,  at  a  cost 
of  a  few  hundred  dollars  a  year,  than  to  allow  the  manager's  attention 
to  be  divided  from  matters  by  which  the  bank  may  lose  thousands  or  tens 
of  thousands. 

One  final  remark.  The  various  books  and  departments  will  be  ar- 
ranged so  as  to  check  each  other.  Especially  should  the  bookkeeping  de- 
partment be  a  check  upon  the  officers  who  handle  money  or  its  repre- 
sentatives. 

The   foregoing   sketch   is   applicable   solely  to   the   single   office   of   a 


26  BANKING    AND    COMMERCE. 

bank.     The  general  manager's  department,  or,  as  it  is  sometimes  called, 
the  Head  Office,  calls  for  a  different  set  of  men  altogether. 

The  Branch  Manager. 

The  manager,  as  Mr.  Gilbart  well  observes,  in  his  practical  treatise, 
is  a  banker  and  not  a  hank  clerk;  and  there  is  somewhat  of  the  same  dif- 
ference between  the  tAvo  as  there  is  between  a  lawyer's  clerk  and  a  lawyer. 

The  manager  should  be  a  man  who  understands  the  principles  of  the 
business,  and  especially  the  principles  on  which  loaning  and  discounting 
should  be  conducted.  He  must  have  the  aptitudes  of  a  man  of  business; 
must  have  more  or  less  of  "savoir-faire;"  must  know  how  to  talk  to  dif- 
ferent classes  of  people ;  in  fact,  he  should  understand  human  nature.  It 
is  he  to  whom  customers  apply  for  loans,  and  to  him  they  explain  their 
position,  their  means,  and  their  difficulties.  He  must  understand  enough 
of  business  to  judge  whether  their  a]iplications  are  reasonable  or  not; 
whether  the  amount  is  proportioned  to  the  extent  of  the  business ;  whether 
the  security  is  good ;  whether  the  time  is  reasonable.  And  as  his  business 
proceeds,  he  must  be  able  to  judge  whether  a  discount  account  is  working 
properly;  whether  the  class  of  bills  offered  is  satisfactory;  above  all,  he 
must  have  a  keen  eye  to  observe  any  signs  o^  coming  trouble,  and  courage 
to  take  measures  accordingly.  Yet  he  must  be  discreet,  and  not  hasty  in 
forming  conclusions;  otherwise,  he  may  do  serious  mischief.  An  import- 
ant part  of  a  manager's  care  is  to  see  that  the  supply  of  money  for  his 
office  is  sufficient,  so  that  he  may  meet  the  daily  demands  of  customers 
and  of  other  bankers  through  the  clearing-house  or  in  course  of  exchange. 
If  he  is  manager  of  a  branch,  he  has  a  head  office  to  fall  back  upon  for 
supplies,  and  a  general  manager  for  orders  or  advice.  But  the  daily  duty 
presses  upon  him  of  seeing  that  his  office  is  properly  equipped  for  meet- 
ing demands.  For  this  reason  he  will  notice  day  by  day  the  balances  at 
his  credit  in  other  banks  or  agencies. 

A  manager  will  pay  special  attention  to  how  his  clerks  per- 
form their  duties,  and  "keep  them  up  to  the  mark"  in  that  respect;  en- 
couraging or  reproving  as  circumstances  arise,  or  if  necessary  changing 
their  positions,  or  recommending  change.  He  will  of  course  be  often  in 
communication  with  the  accountant  in  regard  to  these  matters,  and  will 
see  that  the  accountant  himself  performs  his  duties  properly.^ - 

A  good  manager  will  look  after  the  past-due  bills  of  his  customers,  and 
take  them  specially  under  his  own  charge. 

This  remark  applies  very  particularly  if  any  of  his  customers  become 
insolvent.  It  will  be  his  special  care  to  see  that  the  most  is  made  of  the 
estate,  and  that  the  rights  of  the  bank  are  properly  guarded  in  the  mat- 

12  The  manager  will  of  course  understand  the  work  of  every  man  in  the  office, 
and  should  be  able  to  do  It  If  necessary.  It  will  add  immensely  to  his  influence 
In  the  office  if  he  Is  able  to  go  to  a  clerk  and  say.  "You  are  not  doing  this  work 
properly.  See  now,  this  is  the  way  to  do  it."  suiting  the  action  to  the  word. 
Clerks  in  such  an  ofl;ice  will  be  sure  to  be  alert,  and  will  talk  among  themselves, 
"The  manager  knows  all  about  It:  it  is  no  use  making  foolish  excuses  to  him." 


THE  INTERNAL  ECONOMY  OF  A  JOINT  STOCK  BANK.  27 

ter  of  ranking  npon  it.  If  the  bank  of  wliich  he  is  manager  has  no 
branches,  other  duties  will  devolve  upon  him :  such,  for  example,  as  relate 
to  his  intercourse  with  the  directors,  and  also  to  general  administration. 
These,  however,  are  fully  treated  in  the  chapter  relating  to  the  depart- 
ment of  the  General  IManager.^' 

13  In  a  bank  situated  in  the  United  States,  nearly  the  whole  of  the  foregoing 
will  apply  as  a  description  of  the  work  to  be  done  and  the  men  that  have  to  do  it. 
But  the  person  entitled  "Branch  Manager"  in  the  above  would,  in  an  American 
bank,  be  called  Cashier,  or  possibly  President.  The  only  change  needed,  in  that 
case,  in  the  description  of  his  duties,  would  be  that  Instead  of  having  a  General 
Manager  and  Head  Office   to   refer  to,  he  has  a   Board  of  Directors  on   the  spot. 


CHAPTER    VI. 
DIRECTORS  OF  AN  INCORPORATED  BANK. 

Directors  —  General    Qualifications — Duties  —  The     President — 
Committees  of  Directors — Local  Directors. 

THE  general  framework  of  a  joint-stock  bank  in  Canada  and  in  the 
United  States,  and  in  some  resjDects  also,  but  in  a  lesser  degree,  in 
Great  Britain,  is  defined  by  acts  of  Parliament  or  of  Congress. 

In  Canada  and  the  United  States  the  law  regulates  the  minimum  of 
capital,  the  rights  and  functions  of  stockholders,  and  their  voting  power. 
It  ordains  that  such  banks  must  be  governed  by  a  Board  of  Directors; 
it  regulates  also  the  minimum  amount  of  stock  they  must  hold,  and  the 
minimum  number  of  which  the  board  shall  be  composed.  The  law  gives 
these  directors  the  power  of  appointing  and  dismissing  officers,  but  it  does 
not  prescribe  anything  as  to  the  duties  and  responsibilities  of  such  officers. 

The  Banking  Law  of  Canada  also  limits  the  amount  of  circulating^ 
bills,  and  regulates  the  security  under  which  they  are  issued.  But  it  im- 
poses no  limits  on  deposits,  or  discounts,  or  investments,  or  reserves.  The 
principal  difference  between  the  banking  law  of  Canada  and  that  of  Eng- 
land is  in  the  restrictions  that  the  former  lays  upon  the  manner  in  which 
banking  loans  shall  be  made,  namely,  forbidding  absolutely  any  loans  upon 
real  estate,  and  in  the  imposition  of  elaborate  rules  and  regulations,  with 
penalties,  with  respect  to  loans  on  merchandise,  all  which  are  absolutely 
foreign  to  English  and  Scotch  ideas  of  banking.  But  on  these  points^ 
the  law  of  the  United  States  agrees  Avith  that  of  Canada. 

Directors. 

All  these  and  some  other  minor  points  being  prescribed  by  law,  it  will 
be  well  to  consider  how  such  laws  are,  or  should  be,  worked  out  in  prac- 
tice, in  order  best  to  secure  the  object  for  which  a  bank  is  established. 

Proceeding  upon  this  idea,  it  is  evident  that  the  first  matter  of  con- 
sideration will  be  the  composition  of  the  board  of  directors.  LTpon  this 
will  largely  depend  not  only  the  well-being  and  prosperity  of  the  bank, 
but  the  very  continuity  of  its  existence.  The  government  of  the  bank  is 
placed  in  their  hands  by  law,  and  they  are  lield  responsible  for  it  by 
))ublic  opinion.     And  rightly  so. 

What  manner  of  man  therefore  sliould  a  director  be  individually.* 
And  what  sort  of  selection  should  be  made  with  regard  to  the  men  who 
have  to  act  collectively.-^  These  are  pertinent  questions,  and  an  endeavor 
will  be  made  to  answer  them. 

When   the    legislature    ordained    that    joint-stock    bank?    and    trading 


DIRKCrORS  OF  AN  INCORPORATED  BANK.      2.9 

■companies  should  be  governrd  hy  directors,  the  intention  was  doubtless 
that  these  should  have  somewhat  of  the  i)lace  of  partners  in  a  private 
firm.  This  was  the  theory,  no  doubt.  But  consideration  will  show 
that  it  cannot  be  strictly  carried  out.  For  the  partners  in  a  private  firm, 
whether  of  bankers  or  traders,  are  men  who  have  the  sole  ownership  of 
the  business,  and  are  responsible  to  its  creditors  to  the  full  extent  of 
their  fortune.  They  are,  too,  generally  men  who  have  a  practical 
acquaintance  with  the  business,  most  of  them  having  been  brought  up  to  it, 
and  gone  through  the  grades  necessary  to  a  familiarity  with  its  details. 
The  heads  of  the  trading  houses  of  every  country  are  generally  men 
•of  this  sort,  and  know  how  to  make,  buy,  sell,  and  handle  the  goods  of 
their  line  of  business.  As  to  banking  it  is  well  known  that  the  partners 
in  the  great  private  banks  of  England  have  generally  had  a  practical 
training  in  the  office,  many  of  them  having  entered  early  and  gone  through 
the  grades  of  each  department  exactly  as  if  they  were  to  be  subordinates 
all  their  lives. 

But  it  is  impossible  that  conditions  like  these  should  be  found  in  a 
number  of  men  selected  for  the  board  of  a  joint-stock  bank,  or  of  a  manu- 
facturing company.  They  have  not,  and  cannot  have,  the  technical 
knowledge  that  partners  would  have.  Hence  they  must  rely  much  more 
upon  the  skilled  and  trained  officers  in  their  employ,  upon  whose  shoulders 
rest  the  daily  care  and  administration  of  the  concern.  In  the  sphere  of 
banking  such  a  class  of  officers  has  long  existed,  the  necessity  for  them 
having  arisen  many  generations  ago  in  Scotland  and  the  United  States, 
and  partially  so  in  England.  In  manufacturing  and  trading  corporations 
such  matters  can  only  be  said  to  be  in  a  condition  of  slow  development. 
Meantime  the  question  will  arise  as  to  what  can  be  reasonably  looked 
for  from  a  body  of  gentlemen  who  are  placed  by  law  in  the  position  of 
directors,  but  who  have  not  practical  knowledge  of  the  business  to  be  di- 
rected ? 

To  answer  this,  let  us  first  take  the  case  of  a  Joint-stock  Bank. 

When  a  gentleman  takes  his  seat  for  the  first  time  at  the  board  of  a 
"bank,  and  iiartieularly  one  with  branches  in  various  parts  of  the  country, 
he  will  probably  have  jjlaced  before  him  reports  as  to  its  general  condi- 
tion, the  amount  of  its  deposits,  its  discounts,  and  its  circulation ;  also  the 
amount  of  cash  on  hand  and  balances  in  banking  centres.  He  will  not, 
at  first,  probably  understand  much  about  the  bearing  of  these  statements, 
or  matters  submitted  or  referred  to  the  board,  but  will  learn  later  on. 
By  and  by,  however,  there  will  almost  certainly  arise  matters  of  which 
he  has  some  special  knowledge.  An  account  may  be  offered  at  one  of 
the  branches  by  a  party  in  his  own  line  of  business.  He  then  may  be 
able  to  say  to  his  fellow  directors,  "I  know  that  firm.  They  are  fairly 
well  off  now,  but  the  head  of  the  firm  is  somewhat  tricky.  He  failed 
some  j^ears  ago,  when  he  was  in  business  alone,  and  his  creditors  (I 
was  one)  generally  thought  he  look  advantage  of  them.  You  had 
tetter  be  careful   what   you  do   with   this   application."      Or,   it   may  be, 


so  BANKING    AND    COMMERCE. 

he  can  say  the  exact  opposite  of  all  this;  viz.,  "That  firm  has  not  over- 
much capital,  and  they  have  not  been  long  in  business.  But  they  are 
capable  and  honest:  they  are  the  kind  of  people  that  get  on.  Depend 
upon  it,  they  won't  borrow  what  they  cannot  pay.  You  may  safely  give 
them  credit,  though  perhaps,  not  quite  all  they  ask."  Or  the  board  m«y 
be  discussing  the  case  of  a  customer  who  is  embarrassed,  the  question 
being  whether  the  bank  shall  support  him  or  allow  him  to  fail.  Here 
a  director  who  is  in  wholesale  trade,  and  has  customers  of  his  own,  may 
give  valuable  advice,  based  on  his  own  experience;  or,  it  may  be,  valuable 
information  as  to  the  antecedents  of  the  person  concerned. 

As  time  goes  on,  the  new  director  will  acquire  a  knowledge  of  the 
leading  customers  of  the  bank,  and  their  lines  of  discount,  or  their  loans 
and  the  security  held  therefor.  The  knowledge  that  such  a  director 
acquires  bv  moving  about  in  the  commercial  world,  will  be  of  great 
assistance  in  enabling  him  to  form  a  judgment  with  regard  to  many  of 
these  accounts,  and  specially  if  the  question  arises  of  an  application 
for  a  temporary  advance  without  security.  In  such  a  case,  the  informa- 
tion possessed  by  a  single  member  of  the  board  may  be  of  invaluable 
assistance  to  the  whole,  in  arriving  at  a  safe  conclusion. 

In  time  a  director  may  acquire  sufficient  knowledge  of  the  theory  of 
banking  to  form  an  opinion  as  to  the  general  course  of  its  business; 
namely,  as  to  whether  it  is  extending  its  discounts  too  widely  or  not; 
whether  its  loans  are  properly  distributed;  whether  the  reserves  of  the 
bank  are  sufficient  and  in  proper  shape,  and  other  questions  of  general 
policy,  which  can  only  be  properly  considered  by  a  man  of  experience. 

In  the  case  of  a  director  of  a  manufacturing  company — let  us  say, 
of  a  large  saw-milling  establishment- -a  director  who  is  not  a  practical 
lumberman  may  form  an  idea  as  to  the  financial  position  and  banking 
arrangements  of  the  company,  and  whether  they  are  doing  too  much 
or  too  little  business  for  their  capital.  In  time  he  may  be  able  to  judge 
whether  the  cutting  of  timber  is  proceeding  economically,  and  whether 
the  outcome  of  logs  is  sufficient  for  the  money  expended  on  a  certain 
camp;  whether  the  drive  is  well  managed,  whether  the  mill  itself  is  pro- 
ducing all  it  ought  to  do,  and  of  the  right  proportion  of  qualities.  If 
a  responsible  foreman  or  manager  is  to  be  engaged,  he  may  have  special 
knowledge  of  applicants,  and  so  on.  The  same  principles  will  apply  to 
the  management  of  every  kind  of  manufacturing  enterprise,  whether  it 
be  a  cotton  factory,  an  iron  foundry,  a  sugar  refinery,  or  any  other  of 
the  diversified  industries  of  the  country.  In  all  these,  as  well  as  in  the 
sphere  of  banking,  a  body  of  men  of  business  experience  and  general 
intelligence  may  render  aid  of  a  highly  valuable  character,  even  though 
they  have  no  knowledge  of  the  technique  of  the  business. 

General  Qualifications  of  a  Bank   Director. 
Proceeding  to  the  general  characteristics  that  should  be  sought  for  in 
the  director  of  a  bank,  it  may  be  said  that: 


DIRECTORS  OF  AN   INCORPORATED  BANK.  31 

(1)  A  bank  director  should  be.  in  the  first  place,  a  jiian  of  means. 
The  law  itself  prescribes  this,  to  a  certain  extent,  for  it  orders  that  the 
director  must  hold  a  certain  amouirt  of  stock,  the  amount  being  propor- 
tioned to  the  capital  of  the  bank.  But  the  prescribed  amount  is  small 
compared  with  the  responsibility  of  the  office,  and  it  might,  with  ad- 
vantage, be  largely  increased,  and  doubled  or  trebled  in  the  case  of  an 
ordinary  director,  and  quadrupled  in  the  case  of  a  president.  But  even 
then  a  man  would  be  thought  poorly  qualified  to  direct  the  affairs  of  a 
bank  whose  means  did  not  extend  beyond  such  a  minimum  as  that.  The 
amount  of  wealth  implied  in  the  term  "man  of  means"  should  be  such  as 
gives  a  man  importance  and  standing  in  the  community,  and  causes  him  to 
be  looked  up  to  by  the  people  generally  as  a  man  of  capital  and  sub- 
stance.^* 

It  would  be  well,  as  a  rule,  in  selecting  men  of  wealth  for  directors  to 
give  preference  to  such  as  have  been  the  architects  of  their  own  fortune. 
There  are  exceptions  to  this,  of  course;  but  it  will  be  found,  as  a  rule,  that 
such  men  know  the  value  of  money  better,  how  it  is  gained,  and  how  it  is 
lost,  what  is  safe  and  what  is  not.  A  man  who  has  made  a  success  of  his 
own  business  is  likely  to  be  able  to  direct  other  affairs  successfully. 

(2)  A  bank  director  should  be  a  man  of  character,  respected  in  the 
commimity  he  has  lived  in,  with  good  antecedents  and  connections,  a  man 
of  whom  it  could  be  said  "that  his  word  is  his  bond."  He  should  have  a 
character,  too,  for  good  judgment,  prudence  and  common  sense;  such,  for 
example,  as  would  be  made  a  trustee  of  an  estate,  or  executor  under  a  will. 
If  he  is  a  director  in  one  or  more  trading  corporations  or  in  an  insurance 
company,  it  will  be  all  the  better,  as  evidencing  that  other  men  think  well 
of  him  and  can  work  with  him  in  positions  of  responsibilitj'. 

(3)  A  bank  director  should  be,  as  a  rule,  a  man  of  influence;  that  is, 
he  should  be  able  to  influence  others,  and  therefore  to  influence  business 
to  the  bank.  There  are  in  every  commercial  centre  men  of  both  means  and 
character,  who  are  so  wrapped  up  in  their  own  concerns  as  scarcely  ever 
to  mingle  with  their  fellows;  commercial  recluses  in  fact,  who  know  a 
mere  nothing  of  commercial  affairs  in  general.  Such  men,  as  a  rule,  would 
make  very  indifferent  bank  directors.  AVhat  is  wanted  in  a  bank  director, 
amongst  other  things,  is  the  power  of  influencing  business,  and  the  ca- 
pacity for  bringing  good  accounts  to  the  bank. 

(4)  It  is  desirable  that  there  shall  be,  on  a  bank  board,  men  who  rep- 
resent and  have  connections  in  the  leading  lines  of  business  in  the  country. 
The  applications  for  loans  from  a  bank  come  from  men  of  different 
trades  and  occupations,  and  it  is  obviously  useful  to  have,  at  least,  one 

14  In  using  these  words  it  sliould  be  remembered,  that  wealth  and  substance 
are  relative  terms.  A  man  is  looked  upon  as  wealthy  in  a  village,  who  would 
by  no  means  be  considered  such  in  a  town  or  city.  Similarly,  the  wealthy  man 
of  the  large  town  or  small  city  would  be  accounted  nothing  of  in  London  or  New 
York.  When,  therefore,  it  is  laid  down,  that  a  bank  director  should  be  a  man  of 
means,  the  measure  of  his  wealth  must  be  estimated  according  to  the  rule  of  the 
place  where   the   headquarters   of  the  bank  are   situated. 


32  BANKING    AND    COMMERCE. 

person  on  the  board  who  has  special  knowledge  of  the  trade  carried  on 
by  the  applicant.  Such  a  one  can  give  valuable  hints  to  his  fellow  direct- 
ors or  a  manager  with  regard  to  accounts  of  people  in  that  line  of  busi- 
ness: always  under  the  condition,  however,  that  they  shall  not  be  rivals 
of  his  own.     In  that  case,  his  judgment  Mould  be  apt  to  be  warped. 

(5)  A  bank  director  should  be  a  man  who  can  work  in  harmony  with 
others.  A  cross-grained  and  self-opinionated  man,  a  man  who  considers 
that  all  wisdom  is  centred  in  himself,  and  cannot  bear  contradiction,  a 
man  who  is  unable  to  "give  and  take"  but  must  have  his  own  way  in  every- 
thing, and  at  all  times,  is  not  suitable  for  a  bank  director.  At  the  same 
time  no  man  sitting  at  a  bank  board  should  be  content  to  be  a  mere  dum- 
my, unable  to  give  an  opinion  or  to  maintain  it,  giving  way  at  the  least 
sign  of  dissent,  agreeing  with  everything  and  having  no  mind  of  his  own 
about  anything.  A  board  composed  of  men  of  that  kind  could  not  direct 
anything. 

(6)  A  bank  director  should  be  a  man  who  can  give  sufficient  time  to 
the  affairs  of  the  bank  to  make  himself  acquainted  with  them  generally, 
who  can  attend  board  meetings  with  sufficient  regularity  as  to  make  his 
influence  felt. 

(7)  A  bank  director,  lastly,  should  be  a  good  judge  of  the  capacity 
of  men,  for  a  most  important  part  of  his  duties  is  to  make  aiDpointment'' 
to  the  higher  offices. 

A  Bank  Director's  Duties. 

Such  being  the  qualifications  of  a  bank  director,  it  remains  to  be  con- 
sidered what  may  be  counted  as  his  duties,  and  how  they  should  be  dis- 
charged; in  fact,  what  a  director  should  do,  and  what  he  should  not  do. 

(1)  It  is  clearly  the  duty  of  the  directors  to  see  that  the  officers  of 
the  bank,  especially  those  of  the  higher  grades,  be  men  of  proper  capac- 
ity; also,  to  see  that  they  are  properly  remunerated  according  to  the  gen- 
eral standard  in  such  matters,  and  that  proper  provision  is  made  for  them 
in  case  of  retirement  in  advancing  years. 

(2)  It  is  above  all  the  duty  and  province  of  the  directors  to  see  that 
the  loans,  discounts,  and  investments  of  the  bank  are  made  with  due  cau- 
tion and  on  proper  security.  No  attention  to  other  departments  of  the 
business  can  atone  for  inattention  to  this.  For  in  this  lies  the  key  to 
success  or  failure.  It  is  the  one  thing  to  which  all  others  are  secondary. 
The  directors,  therefore,  will  see  that  all  important  transactions  of  that 
kind  shall  be  submitted  to  them  for  consideration,  saving  only  such  small 
matters  as  may  safely  be  left  to  the  officers.  They  will  also  require 
statements  to  be  laid  before  them  at  every  meeting  of  all  important 
transactions  that  have  transpired  in  the  interval.  And  to  such  statements 
they  will  give  such  attention  as  will  enable  them  to  have  a  clear  appre- 
hension of  the  business  the  bank  is  doing. 

It  has  not  seldom  happened  in  the  case  of  the  failure  of  a  bank  that 
there  were  on  its  board  of  directors  men  of  conspicuous  ability  in  their 


DIRECTORS  OF  AN  INCORPORATED  BANK.  33 

own  line  of  l)usinrss;  and  the  question  was  generally  asked,  how  was  it 
that  such  men  could  allow  the  bank  to  drift  into  such  a  position?  They 
would  never  have  dreamed  of  allowing  their  own  business  to  become  so 
involved ;  how  was  it  they  allowed  it  in  the  case  of  a  bank  at  whose  board 
they  legularly  took  their  place?  It  is  no  proper  answer  to  such  criticism 
to  plead  that  they  were  not  informed  of  tlie  transactions  by  which  losses 
had  been  sustained ;  still  less  that  they  had  not  time  to  examine  state- 
ments put  before  them;  least  of  all  that  they  trusted  all  such  matters  to 
the  manager.  There  are  undoubtedly  numbers  of  matters  that  must  be 
trusted  to  the  manager;  and  it  cannot  be  pretended  that  a  board  of  di- 
rectors shall  be  acquainted  M'ith  the  multitudinous  small  transactions  that 
make  up  so  much  of  tlie  total  business  of  the  bank.  But  experience  shows 
that  as  a  rule  it  is  not  in  the  smaller  transactions  of  a  bank  that  losses 
arise  of  sufficient  amount  in  the  aggregate  to  cause  a  bank  to  fail.  It  is 
invariably  the  case  that  the  failure  or  embarrassment  of  a  bank  arises 
from  the  failure  or  embarrassment  of  a  comparatively  small  number  of 
its  largest  customers.  Tlie*  bank  may  have  live  thousand  small  customers 
whose  transactions  no  board  of  directors  can  take  effective  cognizance  of. 
But  although  there  will  be  an  average  of  losses  from  such  transactions, 
the  average  will  never  be  high  enough  to  cause  serious  difficulty.  But  the 
same  bank  may  have  on  its  books  twenty  or  thirty,  or,  in  the  case  of 
a  very  large  institution,  with  widespread  connections,  forty  or  fifty  ac- 
counts of  considerable  magnitude.  It  is  within  such  a  narrow  circle  as 
this  that  the  storms  of  the  banking  world  strike. 

Now,  it  is  plainly  within  the  power  of  any  board  of  directors  to  keep 
an  efficient  oversight  over  such  a  small  number  of  customers  as  this. 
Amongst  the  circle  of  large  customers,  there  will  be,  to  a  certainty,  a 
proportion  that  practically  do  not  require  watching  at  all;  firms  of  un- 
doubted strength  and  capital,  whose  accounts  are  so  conducted  as  to  give 
evidence  of  their  soundness.  But  there  will  almost  certainly  be  a  propor- 
tion to  which  directors  should  give  close  attention;  make  close  enquiries 
of  the  manager,  and  be  ready  to  check  any  signs  of  irregularity,  or  what 
might  lead  to  danger.  It  is  with  regard  to  this  smaller  circle  that  the 
directors  should  distinctly  not  leave  everything  to  the  manager.  For  if 
they  do,  they  can,  very  fairly  be  held  up  to  reprobation,  if  matters  go 
wrong. 

With  regard  to  these,  the  directors  should  require  constant  and  full 
information.  Long  and  voluminous  lists  of  comparatively  small  transac- 
tions it  would  be  impossible  for  them  to  keep  track  of,  unless  they  were 
prepared  to  spend  the  whole  of  their  time  at  the  bank.  But  any  body  of 
directors  who  take  their  duties  and  responsibilities  seriously  can  keep 
track  of  this  small  number  of  accounts  within  the  time  that  directors  n  ay 
reasonably  be  expected  to  give  to  the  business.  Not  that  they  need  never 
extend  their  observations  beyond  this  circle.  A  director  may  well,  at 
times,  extend  his  observations  over  transactions  of  a  second  and  third 
order  of  magnitude  and  particularly  those  with  regard  to  which  he  has 
3 


34.  BANKING    AND    COMMERCE. 

special  knowlcdfrc.  And  beside  this  duty  of  indindual  directors  it  is 
desirable  for  the  whole  board,  at  times,  to  examine  the  whole  business 
done  at  a  certain  branch,  and  if  needful  to  give  directions  respecting  it. 
By  following  this  method  the  whole  business  of  the  bank  can  be  brought 
under  review  at  least  once  a  year.  But  let  it  be  repeated,  the  circle  of  im- 
portant accounts  should  be  before  the  directors,  not  once  a  year,  nor  even 
once  a  month,  but  constantly.  For  when  a  large  firm  or  trading  company 
begins  to  go  wrong,  it  is  apt  to  go  Avrong  at  a  constantly  accelerating 
pace.  And  its  course  may  be  something  like  that  of  runaway  horses — 
rapidly  getting  beyond  control  and  rusliing  on  to  destruction.  In  one 
short  month  all  this  may  develop,  and  if  directors  intermit  their  atten- 
tion to  large  accounts,  even  for  this  period,  they  may  awake  to  find  that 
one  of  them  has  gone  wrong  to  such  an  extent  that  an  enormous  loss  is 
staring  them  in  the  face.  It  was  one  large  account,  rapidly  developing 
mischief,  that  ruined  the  Royal  Bank  of  Liverpool.  Four  large  accounts 
brought  the  City  of  Glasgow  Bank  to  the  ground.  Yet  the  hundreds, 
indeed  it  may  be  said,  the  thousands,  of  its  sntaller  accounts,  even  of  this 
bank,  were  on  as  good  a  footing  as  those  of  the  rest  of  the  Scotch  banks. 
In  this  case,  too,  the  course  of  deterioration  was  very  rapid.  The  same 
may  be  said  of  the  Western  Bank  of  Scotland.  And,  referring  to  Cana- 
dian banks,  one  of  the  largest  of  them,  the  Commercial  Bank  of  Canada, 
was  ruined  by  one  account,  another  by  some  six  or  seven,  others  by  two 
or  three. 

It  would  be  a  desirable  point  of  administration  for  the  directors  of 
every  bank  to  require  to  be  laid  on  the  table,  at  every  meeting,  a  state- 
ment of  all  advances  amounting  to  a  certain  sum  and  upwards,  at  all 
points;  the  amount  of  the  minimum  to  be  proportioned  to  the  magnitude 
of  the  whole  business.  This  should  not  be  in  too  much  detail,  but  in  such 
a  shape  that  it  could  be  readily  taken  in  and  understood  at  a  single  sitting. 
If  details  are  wanted  in  the  case  of  any  account,  they  could  be  called  for 
and  furnished  by  the  general  manager  at  the  next  sitting. 

It  is  needless  to  add  that  if  the  bank  has  large  investments,  such  as 
considerable  holdings  of  debentures  and  bonds,  these  should  be  examined 
and  criticised  by  directors  also.  They  generally  consist  of  considerable 
sums  of  any  one  security,  and  may  be  looked  over  without  a  great  expendi- 
ture of  time.^^ 

15  These  observations  are  founded  upon  the  theory  that  the  board  of  directors 
should  consist  of  men  who  are  not  only  men  of  character  and  influence,  but  men 
who  understand  the  business  of  the  country,  and  also  have  a  substantial  interest 
in  the  bank.  It  is  a  fact  within  the  author's  knowledge,  that  in  a  certain  great 
banking  corporation  that  failed  the  directors  collectively  held  no  more  stock  than 
would  have  been  considered  much  too  small  for  any  one  of  them  to  hold  individ- 
ually. This  was  before  the  present  Banking  Act  was  passed.  Yet  the  capital  of 
this  bank  placed  it  in  the  front  rank  of  the  banking  corporations  of  the  country. 
These  directors,  too.  consisted  almost  wholly  of  men  who  had  no  practical  ac- 
quaintance with  business. 

In  another  case  of  the  failure  of  a  great  bank  in  the  same  part  of  the  country, 
the  directors  were  largely  retired  gentlemen  or  politicians.  On  one  occasion  when 
an    Important    business    account    was    under    discussion   by  the  board,     one  of  its 


DIRECTORS  OF  AN  INCORPORATED  BANK.  35 

The  President. 

In  considering  the  qualifications  and  duties  of  directors,  one  of  the 
most  important  questions  is  as  to  tlic  position  of  the  president  or  chair- 
man of  the  board.  With  regard  to  tliis  important  matter  wide  differences 
prevail  in  banking  practice.  In  England  and  Scotland,  the  presiding 
officer  is,  as  a  rule,  called  not  President  but  Chairman  of  the  Board.  He 
gives,  as  a  rule,  not  much  more  time  to  the  bank  than  the  other  directors, 
but  is  supposed  as  chairman  to  represent  the  bank  more  perfectly  before 
the  public  and  also  to  give  more  special  study  to  its  affairs.  But  he  does 
not  sign  statements;  and  in  the  reports  of  annual  meetings  his  name,  as 
a  rule,  has  no  more  prominence  than  that  of  other  directors. 

In  other  cases,  however,  the  chairman  (or  president)  gives  more  ac- 
tive and  personal  attention  to  the  bank  than  his  confreres;  giving  more 
or  less  of  daily  attendance;  being  ready,  therefore,  for  any  consultation!) 
Avith  the  manager  or  for  conferences  with  important  customers.  The 
chairman,  if  he  continues  in  office,  year  after  year,  as  he  may  do,  and 
giving  a  large  part  of  his  time  to  the  affairs  of  the  bank,  may  become 
almost  a  practical  banker  himself,  and  able  to  exercise  an  intelligent  and 
capable  supervision  over  every  department  of  its  business.  This,  how- 
ever, presupposes  that  he  shall  be  not  only  in  daily  attendance,  but  give 
as  much  time  and  attention  to  the  bank  as  if  he  were  senior  partner  in  a 
firm.  When  a  great  private  banking  or  commercial  firm  has  assumed  the 
form  of  a  joint-stock  company,  it  is  natural  that  the  late  principal  part- 
ner shall  become  7iot  only  the  chairman  of  the  board,  but  exercise  the 
functions  above  described.  In  this  case,  the  manager  or  general  man- 
ager will  have  less  importance  than  in  the  case  of  a  company  that  has 
been  "joint-stock"  from  its  foundation. 

In  the  United  States  an  entirely  different  order  of  things  has  gradu- 
ally come  to  prevail,  though  it  does  not  prevail  universally  even  yet.  But 
in  a  large  majority  of  banks  the  president  is  a  salaried  officer  of  the  insti- 
tution, performing  the  same  duties  as  the  manager  or  general  manager 
of  an  English  or  Canadian  bank.  He  is  not  a  merchant  or  man  of  busi- 
ness, having  a  position  in  the  community  irrespective  of  his  position  in 
the  bank,  like  the  Chairman  of  an  English  board.  He  is  a  professional 
banker,  and  has  generally  passed  through  the  grades  and  risen  from  the 
ranks,  having  been  promoted,  from  one  position  to  another,  as  other 
officers  have  been. 

There  are  both  advantages  and  disadvantages   in  this  method.      The 

members,  a  retired  admiral  of  the  British  Navy,  after  the  matter  had  been  dis- 
cussed for  some  time  exclaimed,  "Well,  I  can't  express  an  opinion.  I  know  how 
to  sail  a  ship,  but  I'll  be  hanged  if  I  know  anything  of  such  matters  as  this." 
One  of  the  directors  of  this  bank,  almost  the  only  commercial  man  amongst  them, 
confined  his  attention  to  such  small  advances  as  his  own  business  led  him  into 
connection  with.  These  came  to  be  referred  to,  at  board  meetings,  as  Mr.  M.'s 
proteges.  Needless  to  say,  that  the  bank  suffered  no  appreciable  loss  by  this  class 
of  business,  whilst  it  was  overwhelmed  by  the  losses  arising  out  of  political  and 
other  loans   of   great   magnitude. 


36  BANKING    AND    COMMERCE. 

advantages  arc  tliat  such  a  ]ircsidcnt  carries  more  weight  and  authority  in 
the  bank's  daily  administration,  by  reason  of  his  being  a  director.  The 
disadvantage  is,  that  he  does  not  move  about  in  the  commercial  community 
and  acquire  information  as  a  commercial  chairman  of  the  board  would  do. 
Tliis  is  a  serious  practical  drawback.  It  is  a  disadvantage  also  to  the 
man  himself,  that  though  a  salaried  officer,  and  his  livelihood  being  de- 
pendent upon  his  continuance  in  office,  he  is  subject  to  an  annual  election. 
There  is  this  further  to  be  said,  that  it  is  much  more  difficult  for  the  rest 
of  the  board,  in  case  of  need,  to  criticise  imfavorably  the  actions  of  one  of 
their  own  number,  than  if  he  were  simply  an  officer  and  not  a  director. 
And  there  is  more  danger,  under  such  an  arrangement,  of  matters  being 
left  wholly  to  the  president  and  of  his  being  allowed  to  administer  the 
a.Tairs  of  the  bank  without  efficient  check. 

But  some  American  bank  presidents  are  men  who  correspond  to  the 
English  chairman  of  a  board  and  who  have  large  interests  outside  the 
bank. 

In  Canada,  the  position  of  president  is  somewhat  midway  between  the 
English  and  the  American  position.  He  is  always  styled  president,  and 
not  chairman.  And  he  signs  statements  and  documents,  especially  the 
annual  report  to  the  stockholders.  But  he  is  in  no  respect  a  salaried 
officer,  but  a  man  moving  about  in  the  community,  and  having  interests 
of  a  business  character  or  otherwise,  apart  altogether  from  the  bank.  He 
is  always  a  man  of  position,  and  generally  a  man  of  wealth.  Sometimes 
he  has  been  the  founder  of  the  bank,  and  is  the  largest  stockholder  in 
it;  naturally  therefore  being  chosen  president  year  after  year.  In  this 
case  he  will  have  a  somewhat  dominating  influence,  overshadowing  the 
other  directors,  and  exercising  more  influence  in  the  management  than 
all  the  rest  put  together.  This  influence,  moreover,  is  immensely  increased 
by  the  fact  that  under  the  Canadian  law  votes  at  the  annual  meeting 
(when  directors  are  elected)  can  be  by  proxy,  and  that  it  is  an  almost 
universal  custom  for  such  proxies  to  be  given  to  the  president.  He  thus 
carries  the  election  of  the  directors  in  his  hand.  These  are  well  aware 
of  it,  and  the  fact  cannot  but  aff'ect  their  course  of  action.  For  the 
power  that  proxies  give  is  no  mere  nominal  one  in  practice.  It  has  more 
than  once  happened  in  Canadian  banking  that  some  director,  having  given 
umbrage  to  the  president,  has  found  himself  rejected  on  the  day  of  the 
annual  meeting,  much  to  his  surprise  and  annoyance,  solely  by  the  presi- 
dent's proxies.  Such  a  president  is  apt,  at  times,  to  assume  functions 
that  properly  pertain  to  a  general  manager;  a  condition  of  things  that  is 
generally  detrimental  to  the  bank's  interest. 

There  have  been,  however,  presidents  in  Canada  who  corresponded 
much  more  closely  to  the  American  officer  of  that  name.  But  these  have 
invariably  been  men  of  exceptional  ability  and  experience,  who  have  been 
general  managers,  and  were  given  the  title  and  ]iosition  of  president  as  a 
matter  of  honor,  without  the  smallest  difference  l>eing  made  in  their  duties 
or  remuneration. 


DIEECTOPS  OF  AN   INCORPORATED  BANK.  31 

Committees  of  Directors. 

In  some  banks,  especially  those  of  great  majjnitude  and  widespread 
interests,  it  is  customary  for  one  or  more  committees  of  the  board  to  be 
formed,  each  committee  having  a  supervision  over  certain  branches  or  of 
certain  departments  of  the  business.  It  cannot  be  considered  a  desir- 
able plan,  as  it  tends  to  divide  the  interests  of  directors  and  prevent  their 
having  an  intelligent  comprehension  of  the  whole.  It  can  never  be  for- 
gotten that  every  director  is  responsible  to  the  stockholders  for  every  part 
of  the  bank's  administration,  and  that  it  would  be  no  proper  answer  for  a 
director  in  case  of  hcav}'  loss  or  disaster  to  say  that  it  did  not  occur  in 
his  dep;irtment.  On  the  other  hand,  a  small  committee  consisting  of — 
let  us  say — the  president,  the  vice-president,  and  another  member  of  the 
board,  may  sometimes  be  formed  into  a  committee  of  reference.  This 
plan,  however,  will  only  work  when  the  members  of  such  a  committee 
agree  to  give,  and  do  actually  give,  more  time  to  the  business  than  the 
rest  of  the  board.  But  all  such  arrangements  for  committees  are  apt 
to  work  disadvantageously  because  of  their  tendency  to  shift  responsi- 
bility from  the  general  manager  and  to  prevent  his  exercising  the  full 
measure  of  his  capacity  in  his  office.  Every  benefit  that  could  reasonably 
be  expected  from  such  a  committee  would  be  attained  by  frequent  meet- 
ings of  the  board,  say,  twice  a  week,  and  by  making  it  the  interest  of 
directors  to  attend.  A  daily  meeting,  which  has  been  practiced  in  some 
cases,  is  apt  to  degenerate  into  an  occasion  for  talking  politics  or  gossip. 

Local  Directors. 
These  are  authorized  by  the  Banking  Act,  but  the  law  gives  no  power 
of  management,  and  places  no  responsibility  upon  such  directors,  though 
they  may  be  of  great  service  in  distant  branches,  provided  they  arc  men 
who  can  influence  business,  or  give  useful  information  to  the  manager. 
The  best  local  director  to  be  found  will  sometimes  be  the  solicitor  of  the 
bank,  provided  he  has  no  other  interests. 


CHAPTER   VIL 

OFFICERS      OF      AN      INCORPORATED      BANK      HAVING 
BRANCHES— THE  GENERAL  MANAGER. 

The  General  Manager— The   Inspector — Chief  Accountant — Sec- 
retary. 

THE  office  of  general  manager  is  the  last  stage  in  the  evolution  of  the 
government  of  a  joint-stock  bank,  so  far  as  officers  are  concerned. 
The  work  only  arises  when  a  bank  has  arrived  at  the  stage  of  de- 
velopment where  the  bank  has  many  branches,  each  with  a  manager  at  the 
head  of  it.  To  supervise  all  these  subordinate  managers,  to  give  them  direc- 
tions from  time  to  time,  and  to  make  all  their  operations  harmonize  with 
the  workings  of  the  bank  as  a  whole  under  the  directors,  is  the  duty  of  the 
general  manager.     The  title  implies  not  merely  that  he  has  heads  of  de- 
partments under  him — for  that  the  manager  of  a  single  office  has — but 
that  he  has  managers  under  him,  each  of  whom  has  the  control  and  re- 
sponsibility of  his  own  office.     The  position  of  general  manager  is  some- 
what analogous  to  that  of  an  admiral  of  a  fleet,  which  fleet  consists  of  a 
number  of  ships,   each  being  under  the  command   of  a   captain   who   is 
supreme  in  liis  own  sphere.     The  first  and  second  officers  in  such  a  ship 
will  take  their  directions  from  the  captain,  while  he  in  turn  is  subject  to 
the  order  of  the  admiral.     The  admiral  himself  is  subject,  as  to  matters 
of  general  policy,  to  the  Government.     It  is  the  admiral,  however,  who  is 
looked  to  to  insure  success  in  the  operations  of  the  fleet.     If  these  opera- 
tions are  successful  the  honor  is  his;  if  unsuccessful,  the  disgrace  of  fail- 
ure appertains  to  him.     The  analogy  between  this  and  the  functions  of  a 
general  manager  is  very  close.     He  is  a  servant  of  a  board  of  directors 
who  are  entrusted  by  law  with  functions  of  government.     But  for  actual 
and  effectual  carrying  out  of  these  functions  they  are  largely  dependent 
upon  the  general  manager.     He  gives  them  advice  both  as  to  matters  of 
general  policy  and  as  to  the  details  of  operations.     This  advice  they  may 
take  or  refuse  at  their  pleasure.     They  may  modify  it,  suggest  changes. 
or,  if  they  think  well,  reject  it.     This  they  have  the  power  to  do.     But  to 
reject  entirely  the  advice  of  a  professional  banker  in  any  matter  of  im- 
portance, involves  responsibility,  and  directors  will  scarcely  take  such  a 
step  unless   for  very   good  reasons.      This,  certainly,   should   only  occur 
rarely  in  practice,  for  to  be  often  rejecting  the  advice  of  a  general  man- 
ager would  be  a  sure  indication  for  the  necessity  of  a  change.     His  posi- 
tion with  regard  to  the  managers  under  him  is  one  of  undisputed  author- 
ity.    It  is  to  him  they  look  for  direction  as  to  the  course  of  the  business 
of  the  brancli.      .\nd  his  orders  thev  must  obey.      Otherwise  there  would 


OFFICERS    OF    AN    INCORPORATED    BANK.  r,<j 

be  danger  of  serious  miscliief  to  the  bank  as  a  whole.  For  branch  man- 
agers to  fancy  they  can  appeal  to  the  board  against  a  general  manager's 
directions  would  speedily  bring  about  a  dislocation  of  the  whole  business. 
Each  branch  manager.  l)owever,  is  supreme  in  his  own  sphere.  To  him 
his  officers  look  for  directions,  and  his  orders  tliey  must  obey. 

There  may,  of  course,  arise  extraordinary  circumstances  in  which  this 
order  of  things  is  set  aside,  but  the  foregoing  must  be  taken  as  ordinary 
practice. 

To  understand  properly  the  responsibilities  of  a  general  manager  it  is 
needful  that  the  powers  and  functions  of  each  branch  of  the  bank  should 
be  understood.  Every  individual  branch  carries  the  full  powers  and  re- 
sponsibilities of  the  bank  within  itself.  To  the  general  public  and  to 
the  bodv  of  customers,  the  "branch"  is  the  hank.  For  every  dollar  of 
money  deposited  in  the  branch  the  whole  bank  is  responsible.  For  every 
engagement  to  lend  money  or  to  transmit  money  the  bank  is  responsible. 
Tliis  is  the  strength  of  the  branch  system  so  far  as  the  public  is  con- 
cerned. But  there  is  a  reverse  side.  For  every  failure  in  these  respects 
the  whole  bank  is  responsible.  If  at  a  certain  branch,  even  the  least, 
there  were  a  failure  to  perform  any  of  the  engagements  it  had  entered 
into,  the  whole  bank  would  be  discredited.  It  is  under  these  circum- 
stances— and  they  press  upon  him  constantly — that  a  general  manager 
exercises  the  functions  of  his  office.  These  functions  may  be  summed  up 
in  one  sentence.  It  is  his  business  to  see  that  every  branch  during  every 
day  is  properly  equipped  and  managed;  that  it  has  a  sufficient  and  im- 
mediately available  supply  of  money  of  every  kind  for  the  wants  of  cus- 
tomers and  the  public;  that  the  money  lent  at  the  branch  is  lent  safely 
and  according  to  directions ;  that  the  bills  discounted  are  good  bills ;  that 
the  securities  taken  for  loans  are  according  to  law;  that  delinquent  cus- 
tomers are  sharply  looked  after;  that  proper  men  are  appointed  to  the 
various  departments;  that  the  accounts  are  properly  kept;  that  ])roper 
statements  of  the  business  arc  forwarded  to  be  laid  before  the  directors 
and  to  be  reported  to  the  Government,  and,  finally,  that  the  cash  on  hand 
always  corresponds  with  the  amount  shown  in  the  books. 

This  is  a  large  line  of  responsibilities,  but  they,  every  one,  fall  upon  a 
general  manager  day  by  day.  It  is  to  enable  him  to  fulfil  them  that  he 
requires  a  staff  of  officers  whose  duties  are  of  an  entirely  different  de- 
scription from  any  that  have  been  named  hitherto.  The  work  of  a  general 
manager  is  thus: 

1.  A  work  of  supervision. 

2.  A  work  of  audit. 

3.  A  work  of  control. 

To  enable  him  to  perform  these  functions  he  has  in  liis  department : 

An  assistant  general  manager. 

An  inspector  and  officers  under  him. 

A  chief  accountant  and  officers  under  him. 

A  secretary  with  officers  under  him. 


40  BANKING    AND    COMMERCE. 

In  addition  to  these  will  be  an  officer  in  charge  of  the  stock  registers 
and  dividends.     The  most  important  officer  in  the  department  is 

The  Inspector. 

This  officer  is  usually  a  man  of  considerable  banking  experience,  and 
he  has  generally  been  a  branch  manager.  He  visits  the  branches  and 
makes  a  perfect  audit  of  the  accounts  and  examination  of  the  cash  and 
securities.  The  time  of  the  inspector's  visits  is  confidentially  arranged 
with  the  general  manager,  so  that  his  arrival  may  not  be  anticipated  and 
prepared  for.     For  if  it  were,  the  object  of  the  visit  would  be  frustrated. 

In  former  days,  when  practical  banking  was  not  so  well  understood, 
and  no  officer  was  set  apart  to  the  work  of  inspection,  it  was  customary 
for  the  president  to  make  a  tour  of  the  branches,  taking  an  accountant 
with  him  to  assist  in  the  details  of  the  inspection.  But  so  little  was 
thought  of  the  importance  of  secrecy  in  these  visits  that  it  was  generally 
known  throughout  the  branches  that  the  president  was  on  his  annual  tour 
and  might  shortly  be  expected.  It  was  even  sometimes  mentioned  as  an 
item  in  the  daily  papers.  Of  course,  in  that  condition  of  things  prepara- 
tion was  made  for  his  visit.  It  is  known  to  the  writer  that  on  an  occa- 
sion of  this  kind  the  manager  in  a  large  city  branch  was  actually  advised 
that  the  vice-president  of  the  bank  would  be  visiting  the  city  shortly  and 
would  take  the  opportunity  of  examining  his  branch.  At  that  very  time 
great  irregularities  were  occurring  in  the  management,  improper  loans  to 
a  large  amount  being  carried  on  by  overdrafts,  and  false  statements  sent 
week  by  week  to  the  head  office  to  conceal  them.  The  manager,  being 
apprised  of  the  approaching  visit,  took  the  pains  to  transfer  all  the  cur- 
rent accounts  to  a  new  ledger  and  managed,  by  borrowing  checks  and 
concocting  fraudulent  entries,  to  make  the  irregular  accounts  appear  cor- 
rect. The  visit  took  place,  the  books  were  balanced,  the  accounts  were 
examined,  and  all  was  reported  in  order.  Shortly  afterwards,  circum- 
stances transpired  which  rendered  further  concealment  impossible.  The 
manager  came  to  the  head  office  of  the  bank  and  made  a  confession  to  the 
directors,  though  he  did  not  confess  all.  A  trained  officer  was  at  once 
sent  down  to  make  examination.  The  whole  machinery  of  fraud  was 
then  brought  to  light,  and  the  manager's  trick  exposed  of  a  new  ledger 
being  opened  long  before  the  old  one  was  filled  up,  and  bogus  checks 
credited  to  the  fraudulent  account.  This  case  is  referred  to  in  a  subse- 
quent chapter  on  frauds,  but  it  is  noticed  here  to  show  the  folly  of  the 
old  inspecting  system. 

The  importance  of  the  audit  and  examination  by  an  inspector  will  be 
evident  when  it  is  considered  that  it  is  by  reports  and  statements  from  the 
branches  that  the  whole  bank  is  governed.  It  is  only  by  summarizing 
these  statements  that  a  general  manager  can  know,  for  example,  whether 
the  law  with  regard  to  circulation  is  being  complied  with,  or  whether  the 
bank  as  a  whole  is  holding  adequate  reserves  of  cash  and  available  funds. 
It  is  by  statements  from  branches  that  the  head  office  can  judge  whether 


OFFICERS    OF    AN    INCORPORATED    BANK.  41 

they  are  doing  sound  business  and  following  tlie  lines  laid  down  for  the 
government  of  managers.  Yet  he  can  not  know  that  the  statements  are 
correct  except  hij  actual  examination  on  the  spot.  AVhether  there  actually 
is  so  much  cash  at  a  certain  branch  as  is  represented,  whether  the  bills 
discounted  are  secured  as  they  are  reported  to  be,  whether  the  loans  are 
really  endorsed  or  guaranteed  by  the  parties  whose  names  are  entered  in 
the  lists,  these  and  many  other  important  matters  can  only  be  proved  by 
actual  examination.  An  inspection,  therefore,  is  of  vital  importance.  No 
general  manager  and  no  board  can  be  on  sure  ground  with  regard  to  the 
business  of  any  branch  until  an  inspection  has  been  made.  But  to  be  of 
value  the  inspection  must  be  thorough.  An  inspection  carelessly  made  is 
more  dangerous  than  none  at  all,  for  it  lulls  into  a  false  security. 

A  case  once  came  under  the  writer's  notice  of  a  weak  manager,  having 
allowed  some  of  the  securities  for  an  important  account  to  lapse,  and 
being  afraid  to  confess,  went  on  reporting  advances  to  be  covered  as 
before.  The  supposed  endorsers  were  good  beyond  doubt  and,  according 
to  the  statements  rendered,  the  account  was  working  satisfactorily.  But 
when  the  office  was  examined  the  inspector  failed  to  notice  that  the  names 
of  the  supposed  endorsers  were  not  on  the  paper.  They  had  in  fact  with- 
drawn their  names,  having  a  Avell-founded  suspicion  that  the  party  was 
not  doing  well.  This,  however,  the'inspector  failed  to  notice.  The  head 
office  being  lulled  into  a  false  security,  the  account  went  on  as  accounts 
usually  do.  The  advances  increased  considerably,  but  the  business  was 
reported  as  enlarging  and  the  customer  as  prospering,  and  the  endorse- 
ments made  the  account  perfectly  safe — apparently. 

But  a  subsequent  examination  of  the  office  revealed  the  fraud.  Twice 
before,  the  inspecting  officer  had  failed  to  notice  it,  but  he  discovered  the 
real  position  at  last.  The  bank,  instead  of  advances  well  secured,  had 
no  security  at  all;  the  customer's  affairs  were  in  a  bad  condition;  he  had 
been  going  from  bad  to  worse  ever  since  the  endorsements  were  with- 
drawn, and  was  utterly  bankrupt.  Now,  had  the  false  statements  of  the 
manager  been  discovered  at  the  first  examination,  the  account  would  have 
been  stopi)cd  before  much  mischief  had  been  done;  the  customer  would 
have  failed,  but  the  bank  would  have  made  but  a  small  loss.  As  it  was, 
the  loss  finally  sustained  was  sufficient  to  wipe  out  all  the  profits  of  the 
branch  for  years. 

The  inspector's  business  is  therefore  one  of  verification.  Examina- 
tions must  be  made  down  to  the  minutest  detail.  In  counting  bimdles  of 
notes,  for  example,  an  inspector  must  not  make  a  cursory  handling  of 
each  bundle,  but  must  handle  every  note.  He  must  not  excuse  himself 
from  this  minute  examination  by  thinking,  "Oh,  it  is  impossible  that  such 
a  manager  or  such  a  teller  as  this  can  be  wrong."  The  very  reason  of  his 
office,  and  the  work  he  has  to  do,  is  to  prove  that  they  are  not.  If  man- 
agers and  tellers  had  never  done  wrong,  and  never  could  be  guilty  of 
irregularities  and  frauds,  there  would  be  no  need  for  inspections  at  all. 
In  law  ever}'  man  is  considered  innocent  until  he  is  proved  guilty.     The 


w(VERS'T'.i' 


42  BANKING    AND    COMMERCE. 

inspector  M-ho  does  his  work  thoroughly  will  proceed  on  the  assumption 
that  everything  is  wrong  until  he  has  proved  it  to  be  right.  He  will  be 
specially  careful  in  examining  cash  to  guard  against  a  mode  of  manipula- 
tions by  which  a  parcel  can  be  handed  him  twice  over.  This  has  been 
done  to  the  writer's  knowledge  and  a  shortage  covered  up  thereby.  In 
examining  the  checks  on  hand  he  will  be  careful  to  notice  any  indication 
that  they  have  been  borrowed.  This,  too,  has  been  done  and  inspections 
passed  successfully  when  large  shortages  existed  at  that  very  time.*^ 

It  is  important  in  making  examinations  to  notice  any  slight  irregulari- 
ties and  probe  them  to  the  bottom,  for  a  very  trifling  irregularity  may  be 
a  key  to  the  discovery  of  numbers  of  others  extending  back,  perhaps,  for 
months  and  even  years.  For  example,  the  books  of  a  certain  branch  on 
being  examined  by  an  inspector  were  found  to  be  irregularly  balanced. 
This  was  a  key  to  irregularities  that  had  been  going  on  almost  from  the 
day  the  branch  was  opened.  It  is  within  the  writer's  knowledge  that 
these  books  required  to  be  checked  over  again  from  the  very  opening  of 
the  branch  and  much  of  them  absolutely  rewritten.  The  final  result  of 
this  was  that  after  the  irregularities  had  been  rectified,  the  manager,  who 
was  of  course  dismissed,  had  to  make  good  a  defalcation  of  between  seven 
and  eight  thousand  dollars.  In  this  case,  if  the  inspection  had  been  loose 
and  inefficient  the  irregularities  would  certainly  have  gone  on  for  many 
months  longer,  and  the  deficit  have  grown  to  much  larger  proportions. 
It  should  be  noted  that  the  reports  and  statements  made  to  head  office 
from  this  branch  were  always  in  order.     No  amount  of  attention  there 

16  A  sad  revelation  of  fraud  of  this  sort  transpired  in  a  branch  office  of  an 
important  bank  many  years  ago.  The  senior  teller  was  a  man  highly  respected 
In  the  community.  He  had  long  held  his  position,  which  was  an  unusually  good 
one.  It  was,  in  fact,  more  like  that  of  an  assistant  manager  than  a  teller.  He 
occupied  a  beautiful  place  in  the  outskirts  of  the  city,  and  his  pretty  pony  carriage 
was  well  known  to  the  habitues  of  the  streets.  But  one  day  a  rumor  got  about 
that  there  was  something  wrong  with  his  cash,  that  he  had  been  suspended;  then, 
soon  after,  that  he  had  been  dismissed.  It  proved  to  be  too  true.  His  face  was 
seen  no  more  in  the  bank  and  his  pony  carriage  disappeared  from  the  streets;  his 
effects  were  sold  and  he  left  the  city  never  to  return.  The  truth  gradually  leaked 
out.  A  considerable  shortage  was  discovered  in  his  cash.  Whether  it  was  ever 
made  good  the  author  is  unaware,  but  it  is  an  undoubted  fact  that  the  shortage 
had  been  going  on  for  a  considerable  time,  and  that  the  office  had  been  inspected 
more  than  once  whilst  it  existed.  It  then  became  known  to  bankers  in  the  city 
that  the  teller  had  observed  most  carefully  the  movements  of  the  inspecting  officer 
and  had  succeeded  more  than  once  in  ascertaining  very  nearly  when  a  visit  might 
be  e.xpected.  In  preparation  for  this  he  had  on  each  occasion  borrowed  checks 
from  his  friends  in  the  mercantile  community,  of  whom  he  had  many,  "vi-hich 
checks  were  counted  in  amongst  his  cash  when  examined.  It  so  passed  muster. 
The  checks  were  of  course  never  presented.  This,  however,  can  not  often  be  re- 
peated.    The  resource  finally  failed  him  and  discovery  followed. 

Upon  this  case  a  remark  or  two  may  be  made.  The  manager  should  certainly 
have  noticed  the  style  In  which  his  officer  was  living.  His  salary  would  not  have 
allowed  him  to  occupy  such  a  cottage  with  grounds  and  to  keep  a  pony  carriage. 
This  tendency  to  overspending  should  therefore  have  been  checked  at  the  outset. 
In  which  case  all  the  subsequent  sad  developments  might  have  been  prevented. 
It  should  be  said  in  addition  that  it  is  almost  certain  that  there  was  some  loose- 
ness in  the  style  in  which  the  Inspections  were  carred  on,  otherwise  the  shortage 
would  have  been  discovered  at  an  earlier  stage. 


OiriCERS    OF    AN    INCORPORATED    BANK.  4.'? 

could  have  resulted  iu  the  discovery.  But  discovery  immediately  resulted 
upon  an  inspection  on  the  spot.  Yet  there  was  no  anterior  reason  why 
there  should  be  more  suspicion  of  this  branch  than  of  any  other,  for  the 
manager,  though  not  a  practical  banker,  was  a  man  of  high  standing  in 
the  connnunity,  and  was  able  from  his  own  resources  to  make  good  the 
deficiency. 

This  audit  and  examination  is  a  sufficiently  onerous  business  in  itself 
to  occupy  all  the  attention  that  any  man  can  give  to  it.  In  the  examina- 
tion of  the  teller's  department  all  his  care  and  vigilance  will  be  needed  to 
ensure  that  the  cash,  including  checks  and  cash  items,  is  exactly  as  has 
been  represented.  It  has  been  known  that  a  teller  by  clever  sleight-of- 
hand  succeeded  in  i)assing  off"  a  bundle  of  notes  twice  when  his  cash  was 
being  taken  over  by  a  successor.  The  examination  of  the  discounting  de- 
partment is  a  far  more  difficult  and  laborious  matter,  for  here  he  should 
Kot  confine  himself  to  the  mere  checking  of  the  amount  of  each  bill  and 
noting  whether  the  total  agrees  with  the  books,  but  ascertain  whether 
every  bill  is  in  legal  form,  properly  drawn  and  endorsed,  proper  author- 
ity being  held  for  such  as  are  signed  by  officers  of  corporations ;  and  also 
that  proper  vouchers  have  been  received  for  all  the  bills  remitted  for  col- 
lection. It  is  also  his  business,  as  has  been  shown,  to  see  that  the  securi- 
ties for  loans  are  really  as  has  been  represented  to  head  office. 

But  when  an  inspector  goes  beyond  this  business  of  verification  and 
expresses  opinions  upon  the  soundness  and  goodness  of  the  names  or  the 
safety  or  otherwise  of  the  discounts  of  the  office,  he  is  going  beyond  his 
province.  For  in  this  case  he  is  conveying  not  information  but  simply 
opinions,  for  the  formation  of  which  he  has  only  had  slender  opportuni- 
ties. An  inspector  visits  a  branch  only  at  long  intervals,  and  can  not  pos- 
sibly have  the  materials  for  forming  a  judgment  as  to  the  goodness  and 
soundness  of  the  borrowing  customers  themselves.  It  is  his  business  to 
see  that  the  various  securities  are  there,  or  that,  if  sent  away,  there  are 
proper  vouchers  for  them,  and  also,  what  should  never  be  overlooked,  that 
tJiey  are  exactly  as  they  have  been  represented  to  head  office.  But  when 
he  not  only  certifies  of  the  existence  of  bills  and  securities,  but  makes  re- 
ports upon  their  soundness  or  value,  he  raises  two  questions:  one,  as  to 
where  he  gets  his  information,  and  the  other  as  to  the  soundness  of  his 
judgment.  As  to  information,  in  almost  every  case  he  will  get  it  from  the 
manager.  His  report,  therefore,  will  be  a  mere  echo  of  the  manager's 
opinion,  and  consequently  of  no  value  whatever  as  a  check.  As  to  sound- 
ness of  judgment,  that  is  a  quality  not  always  possessed  by  an  inspector. 
It  has  been  known  that  an  inspector  who  was  a  keen  and  vigilant  examin- 
ing officer  was  lamentably  deficient  in  judgment  as  to  the  standing  of 
merchants.  To  suggest  to  head  office  that  the  advances  to  a  certain  cus- 
tomer were  not  on  a  good  foundation  because  they  fluctuated  so  much,  or 
that,  in  considering  the  position  of  a  certain  firm,  if  certain  assets  were 
left  out  they  could  not  be  considered  solvent,  was  not  calculated  to  en 
bance  the  value  of  an  inspector's  opinion.      Yet  both  instances  have  oc- 


44  BANKING    AND    COMMERCE. 

curred  in  banking  i)ractice.  There  can  be  no  doubt,  therefore,  that  for  a 
general  manager  to  get  into  a  habit  of  relying  on  the  opinions  and  judg- 
ment of  an  inspector  as  to  the  soundness  of  the  advances  at  branches,  is 
dangerous.  The  value  of  an  inspector's  work  is  when  he  reports  what  he 
has  seen,  and  communicates  to  a  general  manager  what  the  latter  cannot 
otherwise  know;  such,  for  example,  as  that  such  and  such  an  account  is  a 
very  inactive  one,  or  that  in  another  case  the  deposit  account  of  such  a 
customer  showed  him  to  be  constantly  short  of  money. 

It  is  generally  placed  upon  the  inspector  to  report  upon  the  officers 
of  the  branch.  But  here  again  he  should  only  report  as  to  what,  comes 
under  his  own  observation.  He  can  see  how  an  officer  does  his  work  dur- 
ing an  inspection,  and  how  the  books  in  his  charge  have  been  kept;  also 
whether  he  makes  out  statements  quickly,  and,  in  the  case  of  a  teller, 
whether  he  is  accurate  and  courteous  in  attending  to  customers.  But  to 
express  an  opinion  as  to  the  general  value  of  an  officer,  and  whether  he 
is  worthy  of  promotion  or  otherwise,  is  to  go  beyond  his  province,  for  in 
the  course  of  a  few  da^'s  he  cannot  have  sufficient  opportunities  of  obser- 
vation to  enable  him  to  form  an  opinion  that  could  safely  be  acted  upon. 

Above  all  things  the  error  must  be  avoided  of  allowing  an  inspector 
to  give  orders  and  directions  to  managers.  That  is  the  business  of  the 
general  manager  alone.  If  an  inspector  is  allowed  to  do  this,  there  will 
be  the  proverbial  danger  of  having  "two  masters"  whom  it  is  impossible 
to  serve.  It  is  only  when  the  office  of  inspector  is  held  by  an  assistant 
general  manager,  as  it  sometimes  is,  that  orders  and  directions  can  prop- 
erly be  given  by  him.  But  in  that  case  the  orders  are  given  invariably  by 
the  officer  as  assistant  general  manager,  not  as  inspector. 

In  the  case  of  an  inspector  the  old  saying  applies,  Quis  custos  ens- 
todies?  Who  is  to  inspect  the  inspector?  Who  is  to  see  whether  he  is 
attentive,  efficient  and  reliable.^  It  may  be  thought  that  the  directors  are 
the  persons  to  do  this.  But  the  work  can  only  be  properly  performed  by 
a  professional  banker,  and  the  proper  officer  to  examine  the  inspector's 
work  is  the  general  manager. 

Directors  sometimes  conceive  that  an  inspector  should  be  independent 
of  the  general  manager,  and  that  his  reports  should  be  a  check  upon  his 
superior  officer.  And  it  has  been  known  that  an  inspector  has  endeav- 
ored to  work  himself  into  that  position.  But  it  would  be  dangerous,  in- 
deed, for  directors  to  listen  to  such  overtures,  for,  if  carried  out,  such  a 
course  would  introduce  an  element  of  anarchy  and  confusion  into  the 
business.  There  would  soon  come  to  be  two  governing  officers — two  heads 
— each  having  independent  authority,  but  the  one  more  in  the  confidence 
of  the  directors  tlian  the  other.  There  would  inevitably  be  friction  in 
that  case,  conflicting  i(1eas  of  management  would  be  introduced,  contradict- 
ory directions  could  not  fail  to  be  given  to  managers  of  branches.  These 
officers  would  soon  discover  the  real  state  of  things,  and  ascertain  whose 
directioiis  they  were  to  follow.  This  would  naturally  be  tlic  officer  who 
was  in  the  confidence  of  the  board. 


OFFICERS    OF    AN    INCORPORATED    BANK.  45 

To  put  the  case  in  concrete  form:  The  general  manager  would,  for 
example,  give  directions  that  such  and  such  an  account  was  to  be  handled 
carefulh^,  and  on  no  account  to  exceed  the  limit  fixed.  The  inspector, 
however,  might  say  at  his  next  visit  that  the  account  was  a  very  satisfac- 
tory one  to  the  board,  and  that  close  restriction  was  not  desirable.  The 
branch  manager,  therefore,  being  placed  between  two  fires,  would  lose 
all  sense  of  responsibility  to  head  office,  and  as  he  could  not  please  both 
his  superiors  he  -would  try  to  please  the  customer.  The  general  manager, 
under  such  a  state  of  things,  will  come  to  be  a  mere  "figurehead,"  having 
no  more  controlling  power  than  a  secretary. 

This  is  not  a  fanciful  sketcli  of  what  might  be,  but  a  description  of 
what  has  actually  occurred;  anarchy  and  misrule  prevailing  in  the  estab- 
lishment, and  losses  gradually  developing  which  ultimately  almost  brought 
the  bank  to  a  stop.  Yet  the  board  of  directors  was  one  of  the  ablest  bod- 
ies of  men  ever  brought  together  to  administer  the  affairs  of  the  bank. 

It  will  thus  be  seen  that  a  clear  understanding  of  the  inspector's  real 
functions  and  duties  is  of  essential  importance  to  a  joint-stock  bank.  His 
proper  functions  are  important  enough  and  difficult  enough  to  perform 
without  intruding  into  the  office  of  the  general  management.^" 

The  Chief  Accountant. 

The  chief  accountant's  position  is  of  such  importance  that  he  is  re- 
quired to  join  with  the  president  and  general  manager  in  certifying  the 
correctness  of  the  returns  made  to  the  Government.  He  receives  the  bal- 
ance-sheets of  all  the  branches,  examines  them,  compares  them,  checks 
the  items,  and  finally  summarizes  them  in  one  general  statement  of  the 
cash,  the  deposits,  the  loans  and  discounts,  and  all  the  other  items  re- 
quired by  the  Bank  Act.  It  is  by  these  statements  that  the  board  and 
general  manager,  as  advising  them,  are  guided  in  the  bank's  general  ad- 
ministration, and  as  it  is  simply  impossible  for  a  general  manager,  still 
less  a  president,  to  verify  the  voluminous  details  from  which  the  state- 
ment is  made  up,  they  must,  perforce,  and  in  tlie  nature  of  things,  depend 
on  the  chief  accountant  for  the  accuracy  of  what  they  certify.  The  check 
upon  this  is  the  inspection.  For  the  inspector  examines  the  head  office 
department,  as  well  as  every  other  branch  of  the  bank's  operations. 

17  As  there  are  exceptions  to  every  rule,  it  is,  of  course,  conceivable  that  an 
inspector  on  visiting  a  branch  may  discover  cases  of  glaring  violation  of  rules, 
disobedience  to  orders,  or  even  positive  fraud.  What,  it  may  be  asked,  is  he  to  do 
in  such  circumstances  as  these?  It  is  his  duty  at  once  to  communicate  to  his  head 
office  in  cipher,  by  telegraph,  or  by  telephone,  if  he  can,  and  asli  for  instructions. 
Meanwhile,  he  may  reasonably  take  upon  himself  to  act  in  the  case,  stopping,  it 
may  be,  some  improper  discount  about  to  be  put  through,  or  even  going  the  length 
in  an  extreme  case  of  taking  charge  of  the  office  himself,  pending  instructions. 
But  he  would  in  any  such  case  take  such  a  course  under  responsibility  and  incur 
the  danger  of  severe  reprimand  to  himself  in  case  lie  made  a  mistake  of  judgment 


4f)  BANKING    AND    COMMERCE. 


The  Secretary. 


In  the  general  manager's  department  few  officers  render  more  useful 
service  than  an  active  and  vigilant  secretary.  Tliis  officer  should  be  much 
above  the  rank  of  a  clerk,  although  his  faculty  may  not  be  in  the  sphere 
of  management.  Indeed,  it  has  happened  that  a  secretary  high  in  the 
conridcnce  of  the  board  and  highly  efficient  as  a  secretary  may  prove  a 
lamentable  failure  on  being  entrusted  with  the  responsibility  of  manage- 
ment. 

It  is  his  business  to  keep  all  the  records  of  the  general  manager's 
department  (including  the  voluminous  statements  and  returns  made  there- 
to by  branch  managers),  after  they  have  been  examined  and  action  taken 
thereon.  An  efficient  secretary  will  not  only  keep  such  records,  but  re- 
member their  general  contents,  and  be  able  to  answer  the  general  man- 
ager's questions  about  them  without  loss  of  timie.  All  the  correspondence 
of  the  general  manager  with  managers  of  branches  will  pass  through  his 
hands,  and  here  again  will  be  found  the  importance  of  an  accurate  mem- 
ory so  developed  that  he  can  answer  readily  such  questions  as  are  con- 
stantly arising  in  dealing  with  the  business  of  branches.  "Was  not  such 
and  such  a  manager  advised  about  this  matter  some  time  ago?"  the  gen- 
eral manager  will  say  to  himself  on  reading  a  branch  manager's  letters, 
and  may  thereupon  dictate  a  letter  of  strong  disapproval  of  the  man- 
ager's conduct  in  the  matter.  But  reference  to  a  secretary  might  correct 
the  impression  that  was  leading  to  the  remonstrance,  and  show  that  this 
particular  matter  had  never  been  corresponded  about  at  all.  Or  the  error 
may  be  in  the  other  direction.  "Did  we  not  order  such  and  such  a  man- 
ager to  discontinue  taking  bills  with  the  name  of  such  a  one?"  the  gen- 
eral manager  will  say  to  his  secretary,  and  yet  here  he  is  passing  such 
bills  through  his  books  still.  "Certainly,"  the  secretary  may  reply,  and 
proceed  to  turn  up  at  once  the  copy  of  the  letter  he  well  remembers  to 
have  been  sent.  On  this  a  letter  of  remonstrance  will  be  written  of  a 
character  that  no  branch  manager  would  dare  to  disregard.  For  want 
of  a  watchful  secretary,  a  general  manager  may  even  himself  give  con- 
flicting orders  after  intervals  of  time,  his  judgment  at  one  period  not 
being  exactly  the  same  as  at  another  period  owing  to  a  difference  of 
environment.  A  general  manager  may,  under  the  influence  of  some  de- 
pressing news,  take  a  pessimistic  view  of  matters  in  general,  and  begin 
to  dictate  a  letter  to  the  manager  of  a  branch  expressing  severe  blame  for 
permitting  a  certain  account  to  assume  the  position  it  was  reported  to  be 
in.  Here  a  watchful  secretary  may  interpose  an  observation  like  this:  "I 
think  that  matter  was  the  subject  of  correspondence  some  months  ago; 
will  you  allow  me  to  refer  to  it?"  He  does  so  and  finds  that  the  manager 
at  that  time  reporting  upon  the  account  asked  permission  to  continue  cer- 
tain advances  for  a  time,  giving  reasons  therefor,  which  request  was  al- 
lowed. "The  time  has  not  yet  expired,"  the  secretary  might  say,  on  which 
the  general  manager  would  hold  his  hand,  and  instruct  the  secretary  to 


OFFICERS  OF  AN  INCORPORATED  BANK.  47 

be  watchful  of  the  time,  and   see  that  the  paper  referred  to   was  then 
retired. 

Thus  the  general  manager  is  in  the  position  of  managing  partner  of 
a  large  establishment  who  thoroughly  understands  his  business  but  has 
trained  men  about  him,  eaeh  with  strictly  defined  lines  of  duty,  all  of 
whom  must  be  in  his  confidence,  all  obeying  his  orders,  yet  with  liberty 
to  make  suggestions,  all  acting  together  like  a  complicated  machine,  wheel 
within  wheel,  all  moved  by  one  central  power,  and  all  converging  to  the 
one  uniform  end,  namely,  the  good  of  the  whole  body  of  the  proprietors 
of  the  institution. 


CHAPTER    nil. 

THE  SUCCESSFUL  MERCHANT. 

Conditions  and  Causes  of  Success — Importance  of  Careful  Buying 
— The  Office — The  Warehouse — Training  in  Business — Ele- 
ments of  a  Good  Salesman-  -Knowledge  of  Goods — Knowledge 
OF  Men. 

BEFORE  a  banker  can  do  a  successful  business,  there  must  be  suc- 
cessful merchants,  manufacturers,  or  farmers,  in  the  community- 
It  is  for  this  reason  that  the  consideration  of  their  business  comes 
at  this  stage. 

Some  years  ago  there  was  published  in  England  a  very  readable  book 
entitled  "The  Successful  Merchant,"  in  which  was  described  the  career 
of  a  Bristol  trader  who  was  not  only  a  successful  man  himself,  but  the 
founder  of  successful  firms  that  bear  his  name  to  this  day.  The  success 
of  this  merchant,  it  is  evident,  was  not  due  to  speculative  ventures  by 
which  some  men  seek  to  acquire  a  fortune  rapidly,  but  to  perfect  knowl- 
edge of  his  own  line  of  business,  combined  with  industry,  shrewdness  and 
rectitude.  It  becomes  evident,  too,  that  this  is  the  reason  why  the  busi- 
ness he  founded  has  continued  to  flourish  in  the  hands  of  his  successors. 

It  is  essential  to  the  success  of  a  banker  that  the  mercantile  customers 
with  whom  he  deals  shall  be  on  the  whole  successful  men;  otherwise  they 
will  cause  him  loss  and  embarrassment,  even  though  he  holds  what  is 
called  "security."     For  security  in  many  instances  fails  to  secure. 

It  is  equally  essential  to  a  merchant  that  his  customers  shall  be  also 
successful.  If  they  are  not,  their  failure  will  result  in  even  a  larger  pro- 
portion of  loss,  seeing  that  generally  the  merchant  gives  credit  without 
security  at  all. 

The  losses  of  both  banker  and  merchant  may  be,  and,  indeed,  not  sel- 
dom have  been,  serious  enough  to  bring  both  into  embarrassment,  in  fact, 
they  continually  act  and  react  on  each  other.  The  study  of  the  causes  of 
success  and  failure  is  therefore  one  that  practically  comes  home  to  both. 

Conditions  and  Causes  of  Success. 
Let  us  first  consider  the  conditions  and  causes  of  success.  When  a 
person  enters  upon  any  line  of  commercial  business,  as  distinct  from  mere 
speculation,'^  he  will  find  that  the  first  element  of  success  is  knowledge  of 
goods:  that  is,  what  goods  are,  where  they  are  to  be  bought  to  advantage, 
what  is  the  right  time  to  buy  them  and  how  to  place  them  to  advantage. 

IS  The  difference  between  the  merchant  and  the  speculator  Is  that  the  mer- 
chant handles  the  goods  he  deals  In,  and  therefore  requires  to  be  a  judge  of  their 
quality  and  suitability;  while  the  speculator  rarely  handles  the  merchandise  in 
which  he  speculates,  and  could  not  tell  good  cotton  or  grain  from  bad.  His  busi- 
ness is  simply  to  watch  the  markets,  and  to  buy  or  sell  on  change.  For  his  opera- 
tions he  needs  neither  a  warehouse  nor  stoclc. 

4B 


THE    SUCCESSFUL    MERCHANT.  49 

As  he  progresses  he  will  discover  that  the  second  element  of  success  is 
knowledge  of  men;  that  is,  whom  to  employ,  what  to  give  them  to  do,  to 
whom  to  give  credit  and  whom  to  avoid.  The  first  is  to  be  acquired  only 
in  the  warehouse,  the  second  can  be  learned  best  in  the  office  or  "on  the 
road."  When,  with  these  two,  is  combined  a  reasonable  capital,  together 
with  common  sense,  enterprise  and  integrity,  success  may  be  said  to  be 
not  problematical  but  reasonabh'  certain. 

A  young  man  who  enters  a  mercantile  warehouse,  will  be  employed 
for  some  time  in  learning  how  to  handle  the  goods  dealt  in;  how  to  sort 
and  arrange  them  for  sale,  how  to  receive  and  dispatch  them  with  expedi- 
tion, and  generally  to  become  so  familiar  with  the  stock  as  to  know  where 
any  particular  article  is  to  be  found  and  how  much  of  it  there  is  in  the 
warehouse.  While  doing  this,  the  head  of  the  business  will  have  oppor- 
tunities of  judging  the  young  man's  capacity,  intelligence  and  character; 
also  M'hether  he  is  more  likeh^  to  be  useful  in  the  warehouse  or  in  the 
office.  A  young  man  whose  mind  is  in  the  business  will  desire  to  find  out 
not  only  how  much  goods  sell  for,  but  how  much  they  cost;  also  where 
goods  are  bought,  and  from  whom.  If  the  goods  he  handles  are  not 
bought  strictly  from  manufacturers,  then  he  will  find  out  who  did  manu- 
facture them,  and  where.  An  intelligent  warehouse  clerk  will  try  to 
gather  information  from  young  men  not  in  the  same  house,  and  will,  at 
times,  be  able  to  communicate  to  his  principals  something  to  their  advan- 
tage. 

There  are,  of  course,  other  elements  of  success  in  a  junior,  such  as 
civility,  readiness  to  assist,  quickness  to  obey  orders,  punctuality  in  at- 
tendance. A  good  junior  will  also  avoid  what  mars  the  usefulness  of 
many  a  clever  employee,  viz.,  an  impatience  of  work,  and  eagerness  to 
rush  away  at  the  earliest  moment  when  work  appears  to  be  finished. 

Supposing  that  a  young  employee  has  proved  himself  capable  so  far, 
the  next  step  will  be  to  trust  him  with  the  responsibility  of  selling.  Here 
his  knowledge  of  goods  comes  into  play.  For  many  of  the  customers  of 
a  wholesale  house  have  only  a  vague  idea  of  what  they  want,  and  expect 
to  be  told  what  goods  are  in  the  market ;  to  be  shown  them  and  have  their 
merits  pointed  out  by  one  who  knows  and  can  describe  them  accurately. 

If,  for  example,  the  warehouse  is  that  of  a  dry  goods  merchant,  the 
salesman  will  have  some  knowledge  of  the  person  he  is  speaking  to,  where 
he  comes  from,  and  what  is  the  nature  of  his  business.  It  would  be  ab- 
surd to  show  the  store-keeper  of  a  backwoods  village  the  goods  suitable 
for  a  leading  town  or  city  store.  The  seller  7nust  know  both  his  goods 
and  his  men.  If  the  young  clerk  performs  the  duty  of  a  seller  satisfac- 
torily, in  the  warehouse,  he  has  taken  another  step  towards  ultimate  suc- 
cess.^® 

19  It  is  sometimes  supposed  tliat  to  be  able  to  sell  goods  successfully,  an 
employee  must  not  be  too  scrupulous;  must,  in  fact,  be  willing  to  tell  lies  about 
them.  But  quite  apart  from  the  immorality  of  this,  experience  demonstrates  that 
to  deceive  customers  is  not  to  the  seller's  advantage.  The  deceived  buyer  will 
avoid  the  warehouse  in  which  he  has  been  deceived.     Even  if  he  does  not  go  so 


50  BANKING    AND    COMMERCE. 

It  inaj^  not  be  possible  in  a  large  establishment  for  every  salesman  to 
ascertain  what  is  the  net  cost  of  the  goods  he  is  handling,  and  to  a  ma- 
jority of  those  engaged  in  selling,  a  principal  would  scarcely  think  it  pru- 
dent to  give  such  information.  But  as  a  salesman  grows  in  experience 
he  will  be  sure  to  exercise  himself  in  this  direction.  And  it  is  desirable 
he  should;  for  in  the  case  of  salesmen  and  travelers  of  experience,  they 
may  sometimes  be  allowed  discretion  in  the  selling  price  of  goods.  It 
would  obviously  be  of  advantage  to  a  salesman,  in  using  this  liberty,  to 
know  what  tilings  cost,  so  as  to  ensure  that  no  mistake  was  made  in  re- 
ducing the  price  unreasonably. 

A  successful  salesman  or  traveler  will  exercise  a  good  deal  of  tact  in 
dealing  with  the  peculiarities  of  customers,  and  a  large  amount  of  pa- 
tience and  perseverance  also.  Experience  shows  that  a  stubborn  "no" 
may  be  changed  into  a  complacent  "yes"  by  quiet  and  intelligent  per- 
sistence. Above  all  things  he  will  be  civil;  ready  to  anticipate  a  cus- 
tomer's wishes,  ready  also  with  suggestions  as  to  what  would  be  satisfac- 
tory in  case  the  party  does  not  see  the  article  he  wants.  But  it  is  a  mis- 
take for  a  salesman  to  push  off  undesirable  goods  on  a  customer  by  brag 
and  volubility.  The  customer  who  has  been  overreached  in  this  way  will 
avoid  the  place  in  future. 

In  the  life  of  George  Moore,  of  the  great  house  of  Groucock  and  Co., 
of  London,  who  used  to  be  called  "The  Napoleon  of  the  Road"  because  of 
his  wonderful  quickness  and  energy,  there  is  an  excellent  story  of  his  suc- 
cess M-ith  a  retail  storekeeper  who,  after  repeated  refusals  such  as  would 
have  damped  the  energy  of  most  men,  was  at  last  induced  to  make  a  pur- 
chase of  some  insignificant  article  and  thereby  open  an  account.  The 
door  once  opened,  the  young  traveler  took  care  it  should  be  kept  open; 
with  the  result  that  the  casual  buyer  became  a  valuable  customer  of  the 
house.  The  responsibility  of  a  traveler  is,  of  course,  much  more  than  that 
of  a  salesman  in  the  warehouse.  He  needs  much  more  tact,  more  knowl- 
edge of  human  nature,  more  patience,  more  perseverance.  And,  it  needs 
to  be  added,  he  will  need  to  be  more  watchful  of  liis  own  conduct.  Living 
in  hotels,  he  will  be  in  tlie  way  of  temptation  that  does  not  meet  those 
whose  duties  are  at  home. 

far  as  this,  he  will  certainly  make  a  complaint.  If  he  has  been  deceived  by  an 
employee,  he  will  complain  to  the  principal,  and  the  employee  will  suffer.  If  he 
has  been  deceived  by  the  principal  himself,  he  will  probably  be  more  outspoken. 
In   either  case  he  will  want   redress. 

It  was  said  of  the  late  A.  T.  Stewart,  whose  retail  store  used  to  be  one  of 
the  wonders  of  New  York,  that  one  element  of  his  success  was  this,  "He  always 
turned  the  rotten  side  of  the  melon  up";  a  very  homely  phrase,  but  highly  ex- 
pressive, as  Indicating  that,  if  there  were  anything  defective  about  his  goods,  he 
never  concealed  it.  It  thus  came  about  that  people  had  implicit  confidence  in 
Stewarts  goods  and  consequently  flocked  to  his  store  to  buy  them.  There  are 
manufacturing  firms  in  England  that  have  built  up  a  reputation  by  the  invariable 
rule  of  never  stamping  their  name  on  an  Inferior  article.  They  have  found  the 
advantage  of  this  In  the  fact  that  the  name  came  to  have  a  distinct  mercantile 
value;   such,   for  example,  as  that  of  Rodgers   of  Sheffield,   for  fine  cutlery. 


THE    SUCCESSFUL    MERCHANT.  51 

Tmpoptaxce  of  Careful  Buying. 

Pursuing  the  future  successful  mercliaut  tlirough  his  course  of  prepa- 
ration, and  supposing  him  to  have  achieved  success  as  a  salesman  and  a 
traveler,  the  next  question  will  be,  whether  he  can  be  trusted  with  the 
responsible  function  of  huijing. 

It  is  a  maxim  of  trade  that  "goods  well  bought  are  half  sold."  Though 
the  most  difficult  functions  of  a  buj^er  are  exercised  in  lines  of  business 
where  taste  and  fashion  come  into  play,  yet  his  skill,  if  he  has  it,  will 
find  ample  scope  even  in  dealing  with  raw  materials  and  great  staples. 
Judgment  and  special  knowledge  are  required  even  to  buy  grain,  cheese, 
timber  or  iron  to  advantage. 

Passing,  however,  by  these  for  the  present,  let  us  look  at  the  charac- 
teristics of  a  successful  buyer  of  dry  goods  and  fancy  goods.  Here  an 
essential  difference  must  be  noted.  While  the  buyer  of  grain  or  any  other 
like  commodity  may  make  mistakes,  it  is  certain  that  the  goods  he  buys 
can  be  sold  at  some  price.  But  the  buyer  of  dry  goods  can  never  be  sure 
that  what  he  buys  (unless  it  be  simple  staples)  can  ever  be  sold  at  all. 
The  buyer  then  Avill  naturally  be  one  who  has  had  experience  as  a  sales- 
man or  traveler,  and  has  learned  by  experience  what  the  taste  and  fancy 
of  customers  are  likely  to  be  when  new  goods  are  offered  them.  There 
is  a  difference  in  this  respect,  between  the  customers  of  one  house  and 
another,  between  the  people  of  one  city  and  another,  and  between  one 
period  and  another.  A  class  of  goods  can  be  safely  imported  by  a  mer- 
chant in  New  York  that  it  would  be  unwise  to  bring  into  a  smaller  city. 
As  to  the  difference  between  one  time  and  another  it  is  a  fact  that  in  the 
inflation  that  prevailed  in  the  early  days  of  Manitoba,  there  were  goods 
to  be  found  in  the  Hudson  Bay  Company's  store  at  Winnipeg  of  so  costly 
a  character  that  no  merchant  in  ^lontrcal  and  scarcely  even  in  New  York, 
would  have  dared  to  import  them.  Such  goods  could  be  sold  in  ^^'innipeg 
at  that  time.  Two  years  afterwards  a  heavy  reaction  set  in,  and  no  such 
articles  have  been  seen  there  since. -° 

The  buyer  then  will  consider  the  customers  of  the  house,  as  to  their 
taste  and  capacity,  as  well  as  the  time.  An  intelligent  buyer  after  some 
experience  develops  a  sort  of  intuitive  apprehension  of  goods.     He  could 

20  During  this  inflation  a  rough  looliing  fellow  entered  a  crockery  store  in 
Winnipeg  and  asked  to  be  shown  a  dinner  set.  The  proprietor,  wondering  some- 
what what  such  a  man  w^anted  with  a  dinner  set,  reached  down  one  of  a  common 
character.  The  man,  however,  said  at  once,  "That  won't  do."  Other  sets  were 
then  shown  him  of  a  better  kind,  but  none  of  them  suited  him.  They  were  not 
good  enough.  The  man  then  said,  "I've  had  a  big  stroke  of  luck;  made  $50,000 
out  of  a  piece  of  property,  and  1  want  to  give  my  wife  something  really  tip- top; 
something  extra,  you  know."  The  storekeeper  then  brought  out  a  set  he  had 
specially  imported  for  customers  of  the  nouvcau  rkhc  order;  a  set  of  such  rarity 
and  beauty  that  it  would  have  graced  the  table  of  an  English  nobleman.  The  man 
said,  "That  will  do;"  and  it  was  bought  and  paid  for  on  the  spot.  The  merchant 
showed  his  knowledge  of  the  time  by  ordering  a  single  set  like  this.  But  a  year 
or  two  afterwards,  no  such  goods,  or  goods  of  a  quality  even  many  grades  lower, 
were  ever  seen   on    his   shelves. 


52  BANKING    AND    COMMERCE. 

not  explain  it  if  lie  tried,  but  it  exists,  and  it  will  lead  him  to  say  of  some 
new  patterns,  "Our  house  could  never  sell  them,"  and  of  others,  "These 
will  suit  us  exactly."  Judging  thus  intuitively  he  judges  promptly;  and 
in  a  majority  of  cases  he  will  be  right. 

A  buyer's  judgment,  however,  is  not  only  exercised  as  to  what  goods 
to  buv,  but  how  much.  This,  sometimes,  is  a  more  difficult  matter  to  de- 
termine than  the  other,  for  if  he  buys  too  much,  even  of  an  article  that 
takes  the  fancy  of  customers,  the  extra  quantity  will  be  carried  past  the 
time  when  the  fancy  of  customers  favors  it.  On  the  other  hand,  if  he 
buys  too  little,  a  feeling  of  vexation  is  generated  in  the  warehouse  at  op- 
portunities of  profit  being  missed.  The  latter  error,  however,  is  the  safer 
of  the  two.  If  the  goods  are  evidently  going  off  well  a  repeat  order  can 
be  cabled. 

Buying  too  much  is  a  fcible  of  some  otherwise  capable  men,  and  some- 
times a  cause  even  of  financial  embarrassment.  The  amount  to  be  bought 
is  a  matter  for  the  principal  to  judge  of.  He  will  look  over  his  stock, 
consider  his  average  sales,  and  give  his  buyer  instructions  accordingly. 
But  cases  may  arise  in  which  an  experienced  buyer  may  take  the  risk  of 
varying  from  instructions.  He  may  learn  things  about  the  market  when 
abroad  that  make  it  desirable  rather  to  hold  off  than  to  buy.  Or,  what 
he  learns  may  lead  him  to  buy  more  heavily  than  was  arranged.  This, 
however,  he  will  do  at  his  own  peril.  A  young  buyer  entering  this  difficult 
field  will  do  well  to  err  on  the  side  of  caution  rather  than  otherwise.  Bet- 
ter for  him  to  cable  for  instructions  and  pay  the  cost  himself,  than  to 
make  such  large  purchases  as,  to  the  writer's  knowledge,  have  not  only 
caused  loss  to  his  principals,  but  deranged  the  whole  market. 

There  are  fields  of  mercantile  enterprise  in  which  the  functions  both 
of  buyer  and  seller  would  appear  to  be  far  more  easy  than  the  foregoing, 
seeing  that  prices  are  quoted  day  by  day,  and  that  all  a  man  has  to  do, 
apparently,  is  to  follow  the  market.  A  plausible  theory,  but  utterly  fal- 
lacious. For  in  all  staple  articles,  such  as  grain,  cheese,  wool  or  timber, 
there  is  a  remarkable  range  of  qtiality.  The  grades,  certainly,  are  indi- 
cated by  market  quotations.  But  even  in  such  apparently  simple  mat- 
ters as  grain  and  flour,  there  are  shades  of  difference  that  none  but  ex- 
perts can  appreciate. 

Yet  it  is  often  in  a  correct  appreciation  of  these  that  the  profit  or  loss 
of  a  given  line  of  operations  consists.  The  same  remark  applies  to  im- 
ported articles  in  other  trades,  such  as  groceries,  fruit,  wines,  raw  sugar ; 
not  to  speak  of  hardware,  iron  and  steel,  in  all  of  which  there  is  room  for 
the  finest  exercise  of  judgment  on  the  part  of  the  buyer  as  to  the  quality 
of  goods.  It  may  indeed  be  laid  down  as  an  absolute  rule  with  regard  to 
every  variety  of  staple  goods,  that  none  but  a  man  of  experience  can  safe- 
ly venture  on  the  operation  of  buying.  If  he  does,  he  will  infallibly  "burn 
his  fingers,"  and  if  he  continues,  he  will  ruin  himself. 


i:-*-' — 1  -  THE    SUCCESSFUL    MERCHANT.  53 

The  Office. 

Passing  now  from  the  warehouse  to  tlie  office,  let  us  consider  what  is 
done  therein  as  bearing  on  tl)e  conduct  of  a  successful  business.  Here  are 
kept  the  records  which  show  whether  the  business  is  or  is  not  on  a  proper 
foundation,  and  whether  it  is  being  conducted  profitably  from  time  to 
time.  It  is  in  tlic  office  that  the  merchant  ascertains  whether  credit  is  be- 
ing given  judiciously,  who  and  what  the  customers  of  the  firm  are;  wheth- 
er prompt  in  payment  or  otherwise;  whether  profits  are  being  made,  and 
what  are  the  drawbacks  in  the  shape  of  losses. 

The  important  matter  of  Insurance  will  here  come  before  him,  also  the 
financial  management  of  the  house.  Above  all,  it  is  here  he  will  ascertain 
whether  he  is  keeping  on  a  right  footing  with  his  banker.  That  all  these 
are  vital  elements  in  the  success  of  a  business,  every  merchant  knows; 
indeed,  the  trend  of  experience  shows  that  business  failures  are  more  fre- 
quently traceable  to  defective  management  in  the  office  than  in  the  ware- 
house. For  one  merchant  who  fails  by  reason  of  not  understanding  his 
goods,  ten  fail  because  of  injudicious  crediting,  too  easy  collecting,  neg- 
lect of  insurance,  an  incorrect  style  of  stock  taking,  too  small  capital,  too 
heavy  drawings  of  partners,  too  heavy  borrowing,  and  general  lack  of 
economy.  All  these  are  matters  for  the  office.  It  is  not  so  essential  for 
the  principal  to  have  passed  through  the  grades  of  o^ce  work,  as  that  he 
should  have  had  a  thorough  training  in  handling  goods.  But  every  prin- 
cipal should  have  had  so  much  experience  as  to  understand  office  records, 
and  to  see  Avhether  office  work  is  properly  done,  and  if  the  statements 
rendered  to  him  from  time  to  time  can  be  depended  upon. 

In  large  mercantile  firms  a  judicious  combination  of  talent  is  desir- 
able, so  that  while  one  partner  shall  be  particularly  conversant  with  goods, 
another  shall  be  familiar  with  finance  and  office  work;  each  giving,  as  a 
rule,  imdivided  attention  to  his  own  department,  yet  being  able  at  times 
to  take  an  oversight  of  the  other  in  case  of  need.  But  where  there  is  only 
one  partner,  and  one  who  has  a  thorough  familiarity  with  goods,  it  is  de- 
sirable that  he  should  have  at  the  head  of  his  office,  not  a  mere  bookkeeper, 
however  efficient,  but  a  reliable  man  to  Avhom  he  can  entrust  the  manage- 
ment of  the  finances  and  accounts  of  the  house.  To  a  man  of  this  sort  he 
will  pay  such  a  liberal  salary  as  will  make  him  as  much  attached  to  the 
business  as  if  he  were  a  partner.  Such  a  person  will  save  his  salary  many 
times  over  by  attention  to  credits,  prompt  collecting,  sufficient  insurance, 
attention  to  economic  details,  keeping  stock  within  due  bounds;  and  last, 
but  not  least,  keeping  the  borrowings  and  discounts  of  the  house  within 
such  limits  that  their  cost  will  not  be  a  drain  on  the  business. 

The  foregoing  may  be  called  the  elementary  foundations  of  success  in 
business  as  now  carried  on.  They  may  not  all  have  been  necessary  in  the 
earlier  days  of  the  country.  Many  a  man  then  succeeded  who  conducted 
his  business  by  rule  of  thumb.  But  competition  is  now  too  keen  and  its 
methods  too  developed  to  permit  any  man  to  succeed  who  is  not  equipped 
at  all  points. 


54  BANKING    AND    COMMERCE. 

But  this  is  not  all  that  is  necessary  to  success. 

There  liave  been  men  who  could  sell  and  buy  goods,  and  know  how  to 
keep  accounts,  too,  who  have  entirely  failed  in  the  attempt  to  carry  on 
business  for  tliemselves. 

It  was  said  tliat  at  one  time  a  considerable  number  of  the  salesmen  in 
the  employ  of  Mr.  A.  T.  Stewart,  of  New  York  (who  has  been  already  re- 
ferred to)  were  men  who  had  failed  in  business.  They  were  expert  sales- 
men ;  and  perhaps  some  of  them  expert  buyers,  but  were  deficient  in  other 
qualities  essential  to  success.  They  could  serve  an  employer  and  be  de- 
pended upon  to  follow  instructions.  But  experience  had  })roved  that  they 
could  not  succeed  when  they  had  no  guidance  but  their  own  judgment. 

What,  then,  are  the  other  and  final  conditions  of  business  success, 
permanent  success,  let  us  say,  in  addition  to  the  technical  knowledge 
and  skill  before  referred  to?  The  consideration  of  these  is  of  sufficient 
importance  to  form  tlie  subject  of  further  treatment. 


CHAPTER   IX. 
THE  SUCCESSFUL  MERCHANT— Continued. 

Creoit  and  Capitai, — Business  Location — Extending  Credit— Econ- 
omy IN  Business  Expenditures — Insurance — Interest  and  Dis- 
count— Advertising — Personal  Drawings — Progressiveness  and 
Courtesy — Carefxti,  Accounting. 

PERSONS  of  little  experience  in  the  world  may  think  it  strange  that 
a  man  whose  character  and  capacity  have  been  such  as  were 
sketched  in  the  preceding  paper  should  not  succeed  in  business. 
Experience,  however,  shows  that  they  do  so  fail.  But  that  we  may  under- 
stand what  is  meant  by  success  or  failure  let  us  remember  that  conimercdal 
business  in  this  treatise  is  considered  in  relation  to  banking.  Following 
this  clue,  it  must  be  answered  that  the  successful  merchant  is  simply  and 
essentially  one  who  is  able,  from  the  beginning  to  the  end,  to  meet  his  en- 
gagements; to  perform  every  obligation  he  has  entered  upon,  and  to  close 
his  business  career  without  being  in  debt  to  any  man.  He  may  and  ought 
to  aim  at  more,  but  considering  the  number  of  persons  who  fail  in  this 
primary  condition,  this  must  be  looked  on  with  no  little  satisfaction.  But 
if  the  idea  of  success  is  to  be  carried  no  further  than  this,  the  mercantile 
world  will  generally  pronoimce  it  to  be  inadequate.  Every  man  on  enter- 
ing business  aspires  after  something  beyond  this,  otherAvise  he  might  as 
McU  have  remained  an  employee.  What  he  generally  aspires  after  is,  at 
least,  a  competency — a  sufficiency  over  and  above  his  liabilities  to  support 
him  when  old  age  has  deprived  him  of  his  powers. 

Credit  and  Capital. 

No  man  could  conduct  his  business  with  comfort  if  he  were  always 
on  what  may  be  called  "the  ragged  edge"  of  this  world's  affairs,  being 
barely  able  to  pay  his  debts  and  nothing  more.  A  captain  may  at  times 
have  to  sail  close  to  the  wind,  but  if  he  made  a  practice  of  so  doing  he 
would  undoubtedly  lose  his  ship.  There  must  be  a  margin  if  there  is  to 
be  any  satisfaction  in  business ;  and  this  margin  in  the  case  of  a  merchant 
is  his  Capital.  Of  this  a  few  words  require  to  be  said.  And  the  first 
thing  is  that  tlie  capital,  so  called,  must  be  a  man's  own.  There  is  hardly  a 
more  dangerous  delusion  than  for  a  merchant  to  talk  of  "borrowed 
capital,"  and  no  more  dangerous  practice  than  to  enter  in  his  balance 
sheet  as  "capital"  money  that  does  not  belong  to  him.  Borrowed  money 
is  not  "capital,"  it  is  a  liability.  No  matter  though  the  loan  has  been 
arranged  for  a  long  term,  though  there  may  be  an  apparent  certainty 
of  the  loan  being  renewed  when  due,  or  what  is  more  dangerous,  that 


56  BANKING    AND    COMMERCE. 

no  period  of  payment  has  been  fixed  at  all — money  borrowed,  no  matter 
from  whom  or  under  what  circumstances,  is  not  "capital." 

Traders  sometimes  think  it  does  no  harm  to  reckon  as  capital  an 
amount  of  money  which  is  certain  to  remain  in  the  business  for  a  con- 
siderable period.  But  it  does  this  harm,  that  a  merchant,  if  he  so 
considers  it,  will  incur  risks,  buy  goods,  and  give  credit  to  a  larger 
amount  than  he  would  do,  if  he  rigidly  thought  of  this  supposed  capital 
as  a  debt  of  which  payment  would  some  day  be  demanded.-' 

Capital,  then,  is  what  a  merchant  owns  himself,  on  which  no  other 
person  has  a  claim,  the  surplus  over  all  liabilities,  no  matter  to  whom. 

To  ensure  success  in  business,  capital  must  be  sufficient;  an  elementary 
truth,  indeed,  but  capable  of  a  great  variety  of  applications.  For 
example,  it  may  be  taken  as  a  well  established  truth,  that  other  things 
being  equal,  the  larger  the  business  the  larger  the  capital  needed.  But 
the  proviso,  other  things  being  equal,  must  be  carefully  noted.  The 
slower  the  course  of  the  business,  the  more  the  capital  required  to  conduct 
it.  The  country  store  doing  business  where  payments  are  only  made 
once  a  year,  requires  more  capital  than  a  town  store  that  sells  a  good 
deal  for  cash,  and  gives  no  credit  for  longer  than  a  month.  And  the 
cash  store,  that  gives  no  credit  to  anybody,  requires  pari  passu  least  of 
all.  The  business  of  a  saw  miller  or  the  maker  of  timber  is  one  that 
calls  for  an  unusually  large  capital  in  proportion  to  the  annual  production ; 
for  expenditures  go  on  continuously  for  a  whole  year  before  the  article 
is  ready  for  market.  At  the  other  end  of  the  scale,  we  find  a  grain 
merchant  where  the  article  is  botight  and  sold  on  the  spot  for  cash.  This 
consideration,  of  course,  determines  the  percentage  of  profit  called  for. 

It  is  argued  by  some  theorists  that  credit  answers  every  purpose  of 
capital.  It  answers  some  purposes  of  capital,  for  a  time,  beyond  doubt. 
But  such  theorists  are  apt  to  forget  that  crenit  vmst  always  he  paid  for, 
no  matter  in  what  shape  it  is  taken,  whether  in  goods  or  in  money.  And 
experience  shows  that  what  is  paid  for  credit  in  the  shape  of  interest 
sometimes  absorbs  all  that  remains  of  profit,  after  expenses  and  losses 
have  been  provided  for.  Young  men,  for  example,  who  buy  out  the 
assets  of  an  established  firm,  paying  a  small  amount  down  and  giving 
notes  for  the  balance,  may  find  that  interest  absorbs  their  profit  year  by 
year,  and  renders  progress  impossible.  The  same  thing  is  likely  to 
h-ippen  when  a  young  man  is  set  up  in  business  by  a  wholesale  house, 
he  having  nothing  worth  the  name  in  the  shape  of  capital.  The  house 
fells  him  a  stock  of  goods,  and  keeps  him  supplied  with  what  he  needs. 
He  is  compelled  to  buy  from  them,  for  if  he  buys  elsewhere,  they  can 
bring  his  business  to  a  stand.  Under  these  circumstances,  he  invariably 
pays  a  high  price  for  everything  he  orders,  which  high  price  really  rep- 

21  A  very  common  form  of  the  delusion  spoken  of  is  apt  to  arise  when  a  part- 
nership is  dissolved,  and  the  retiring  partner  leaves  his  money  to  those  who 
remain.  The  remaining  partners  are  then  under  constant  temptation  to  consider 
the  capital  of  the  house  to  be  as  much  as  before,  and  to  carry  on  business  accord- 
ingly.    From   this  delusion   they  sometimes  receive  a   rude  awakening. 


THE    SUCCESSFUL    MERCHANT.  57 

resents  tlic  interest  on  his  indebtedness,  together  witl)  compensation  for 
the  risk  run  by  the  supplying  house.  If  a  man  determines  to  break  the 
chain  and  get  free,  bending  his  energies  to  effect  it  by  a  steady  course 
of  economy  and  industry,  he  may  possibly  make  progress,  and  in  time 
acquire  a  competency.  But  if  not,  he  will  almost  certainly  toil  on 
through  life,  and  be  as  poor  at  the  end  as  he  was  at  the  beginning.  But 
in  a  majority  of  cases  he  will  fail  during  the  process,  and  if  the  support- 
ing house  fails,  he  will  fail,  too. 

As  to  the  approximate  amount  of  capital  required  for  safety,  it  may 
be  roughly  estimated  as  follows:  For  a  storekeeper,  or  a  merchant  whose 
business  is  moderately  brisk,  about  one-fifth  or  sixth  of  his  annual  sales; 
in  a  slower  style  of  business,  about  one-third  or  fourth.  A  manufacturer 
of  any  kind  should  have  at  least  as  much  capital  as  his  factory  or  mill 
with  its  plant,  water  power  or  machinery  have  cost  together  with  the 
price  of  the  land.  In  the  case  of  a  saw  miller,  the  value  of  his  limits 
or  timbered  lands  must  be  added.  A  merchant  in  agricultural  products, 
during  the  season  of  navigation,  may  do  a  large  business  on  a  smaller 
capital  than  a  merchant  in  any  otlier  line  of  business:  for  the  movement 
is  so  quick  that  he  may  be  able  repeatedly  to  turn  over  his  whole  capital  in 
a  week.  To  do  this,  however,  he  must  act  on  the  principle  of  steadily 
selling  as  fast  as  he  buys. 

But,  when  navigation  is  closed  in  river  and  canal,  a  produce  merchant 
inay  find  at  times  that  he  cannot  profitably  move  his  product  at  all.  He 
should  therefore  have  as  much  capital,  at  least,  as  will  enable  him  to 
meet  not  only  the  fluctuations  of  the  market,  but  unfavorable  conditions 
of  trade. 

Paradoxical  as  it  maA'  sound,  it  is  undoubtedh'  true  that,  on  entering 
upon  business  it  is  not  desirable  for  a  firm  to  have  too  much  capital.  If 
they  have,  they  will  be  apt  to  indulge  in  an  easy-going  style  of  conduct- 
ing business,  crediting  too  much,  not  collecting  sharply,  carrying  too 
much  stock,  all  of  which  are  bad  habits  and  may  lay  the  foundation  of 
future  embarrassment. 

If  a  father  is  setting  up  his  son  in  business,  the  wisest  course  to 
pursue  is  to  give  him  such  an  amount  of  capital  onh'  as  will  necessitate 
his  being  both  industrious  and  careful.  Better  he  should  learn  the  value 
of  money  by  being  occasionally  short  of  it.  Better  he  should  learn  to 
be  economical  in  personal  and  business  expenses  by  its  being  rendered 
impossible  for  him  to  be  otherwise.  The  law  of  necessity  is  a  wholesome 
one,  though  many  a  man  has  fretted  by  reason  of  its  pressure.  Experi- 
ence, in  the  majority  of  cases  and  in  due  time,  will  convince  him  that  it  is 
salutary. 

Value  of  a  Goon  Business  Location. 

An  important  element  of  success  in  mercantile  business  is  a  good 
stand  in  a  proper  locality;  and.  in  the  case  of  such  a  business  as  dry- 
gcods,  a  well  arranged,  well  lighted,  and  convenient  warehouse  or  store. 


58  BANKING    AND    COMMERCE. 

But,  even  in  the  same  locality  and  in  the  same  street  there  are 
differences  in  the  eligibility  of  a  stand.  The  chance  of  obtaining  a  choice 
corner  has  not  seldom  been  the  making  of  a  business.  On  the  other  hand, 
1he  energy  and  skill  of  an  able  man  may  be  neutralized  by  a  badly 
lighted  store,  or  one  placed  on  the  wrong  side  of  the  street. 

With  regard  to  the  building  in  which  he  is  to  carry  on  business,  a 
young  merchant  will  beware  of  entering  upon  a  warehouse  too  large  for 
his  means.  If  he  makes  this  mistake,  he  is  in  danger  of  either  attempting 
too  large  a  style  of  business  for  his  capital,  and  being  continually  ham- 
pered for  money,  or  of  paying  out  too  much  of  his  profits  for  rent  and 
taxes. 

The  Extension  of  CnEmr. 

But  now,  on  the  supposition  that  a  merchant  who  knows  his  business, 
has  secured  a  warehouse  in  a  good  position,  that  he  has  a  proper  amount 
of  capital,  that  with  the  judgment  of  a  good  buyer  he  has  laid  in  a 
seasonable  stock  of  goods,  he  will  immediately  be  confronted  with  the 
difficult  question  of  giving  credit.  In  all  lines  of  wholesale  business,  this 
may  be  said  to  be  the  question  of  questions.  It  is  even  so  to  some 
extent  with  a  retailer,  especially  in  a  country  store. 

The  giving  of  credit  in  a  country  where  the  average  of  failures  is 
so  high  at  times  as  it  is  in  Canada  is  so  difficult  a  function  to  exercise, 
that,  in  a  large  establishment,  it  is  well  for  one  partner  to  devote  his 
M'hole  attention  to  it. 

In  this  matter,  a  few  general  rules  and  principles  may  be  indicated 
as  the  result  of  experience,  some  of  which  are  applicable  to  the  whole- 
sale merchant  and  some  to  the  retail  storekeeper.  It  may  be  said,  also, 
by  the  way,  that  most  of  them  apply  to  a  Banker  also. 

With  regard  to  the  former,  the  importance  of  correct  information 
cannot  be  too  much  emphasized.  Get  information,  and  he  always  on  the 
lookout  for  more;  that  should  be  the  rule.  Day  by  day,  it  should  be  the 
merchant's  business  to  keep  his  information  up  to  date.  The  things 
he  knew  about  his  customer  a  year  ago  may  utterly  mislead  him  now. 
Solvent  a  year  ago  and  doing  well,  a  man  may  now  be  losing  ground 
and  even  unable  to  pay  his  debts.  But  while  the  present  condition  is 
important,  the  past  has  also  to  be  considered.  A  man's  antecedents  are 
an  important  element  in  considering  whether  he  is  deserving  of  con- 
tinued credit  or  not.  Information  requires  sifting,  for  there  are  false 
reports  as  well  as  true.  The  working  of  a  customer's  account  will  tell 
him  much.  Conversation  with  the  customer  himself  will  elicit  what  could 
not  otherwise  be  learned.  The  traveler  who  waits  upon  him  will  bring 
information  also.'^ 

It  is  always  desirable  for  a  mercantile  house  to  have  a  maximum 
sum  beyond  which  they  will  trust  nobody.  This  maximum  will  be  care- 
fully considered  in  relation  to  the  capital  of  the  house  itself,  and  so 

22  All  this   will  be  more  fully  considered  further  on. 


THE    SUCCESSFUL    MERCHANT.  59 

regulated  that  the  failure  of  no  five  or  six  persons  could  bring  the  firm 
into  embarrassment.  But  the  bulk  of  the  accounts  carried  by  a  firm  will 
be  far  smaller  than  tliis.  That  good  old  trade  maxim,  "Divide  your 
risks,"  can  never  safely  be  forgotten.  A  tendency  to  be  watched  is  for 
Ihe  large  customers  of  a  firm  to  drift  into  a  habit  of  leaning  upon  the 
liouse.  Such  accounts  have  a  general  tendency  to  go  on  increasing,  and 
their  very  size  makes  it  difficult  to  t])row  them  off.  It  is  always  known  in 
the  trade  that  such  and  such  customers  are  "supply  houses"  of  this  firm 
or  tliat,  and  the  fact  of  the  parties  desiring  to  open  an  account  else- 
where raises  a  suspicion  that  the  supporting  firm  desires  to  get  rid  of 
Ihem.  Hence  they  cannot  be  got  rid  of  at  all;  the  only  alternative  being, 
either  to  bring  them  to  a  stop  and  face  a  loss,  or  carry  them  on  with  a 
c-onstant  endeavor  at  reduction,  whicli  is  generally  futile. 

In  the  ordinary  run  of  accounts  the  amount  of  credit  will  vary  with 
the  means  and  standing  of  the  customer,  a  theory  which  is  unquestionably 
true,  but  which  requires  a  firm  liand  and  watchful  oversight  to  carry 
out.  For  some  customers,  when  kept  strictly  within  bounds  by  one  house, 
-tvill  endeavor  to  run  up  an  account  with  another.  A  dangerous  amount 
of  credit  may  arise  when  dealings-are  with  a  number  of  houses;  each  one 
imagining  its  own  line  to  be  judicious,  while  the  whole,  collectively,  are 
unreasonable  in  a  high  degree.  The  remedy  is  to  keep  well  informed, 
and  to  require  periodical  statements  from  customers,  in  addition  to  which 
the  partner  at  the  head  of  the  credit  department  will  find  it  useful  to 
have  statements  rendered  him  by  his  clerks  in  comparative  form,  showing 
the  progress  of  aceimnts  from  month  to  month,  or  year  to  year,  indicating 
the  amount  of  a  customer's  purchases  during  these  comparative  periods. 
From  this  it  could  readily  be  seen  whether  the  account  was  sufficiently 
active  for  the  indebtedness. 

The  head  of  the  credit  department  of  a  house  will  also  do  well  to 
note  any  hints  he  may  receive  from  his  banker.  The  banker  often  knows 
what  the  merchant  does  not.  He  deals  with  other  houses  in  the  same 
trade,  and  has  branches  in  other  cities.  He  may  therefore  be  able  to  say 
to  a  wholesale  merchant:  "You  are  aware,  I  suppose,  that  such  a 
customer  of  yours  is  running  an  account  with  a  house  in  another  city?" 
The  banker  need  not  violate  confidence  by  going  into  details.  "A  word 
to  the  wise  is  sufficient."  But  if  a  hint  is  not  sufficient,  a  banker  may 
sometimes  render  an  essential  service  by  throwing  out  the  paper  of  that 
customer. 

The  real  test  as  to  whether  a  merchant  is  crediting  judiciously  is  the 
average  percentasre  of  his  losses  to  his  sales.  Some  percentage  every 
merchant  may  expect.  But  in  ordinary  times  this  percentage  should  be 
so  moderate  as  to  make  no  serious  impairment  of  profits.  Even  in  times 
of  depression,  when  insolvencies  are  double  or  treble  the  average,  the 
losses  ought  never  to  be  so  much  as  to  impair  the  stability  of  the  house, 
though  they  make  serious  inroads  into  its  profits. 

The    foregoing    observations    have    reference    wholly    to    dealers    in 


60  BANKING    AND    COMMERCE. 

imported  or  nianufacturcd  goods.  Tlie  dealing  in  exports,  liowevcr,  is 
governed  by  other  eonsidcrations.  It  mny  be  laid  down  as  a  general  rule 
that  the  exporter  of  Canadian  products,  partly  from  the  nature  of  the 
products  themselves,  and  partly  from  other  circumstances,  should  usually 
give  no  credit  at  all.  For  how  can  he  keep  himself  informed  of  the 
changing  position  of  merchants  in  a  foreign  country.^  A  partner  may 
die  or  retire,  yet  the  conservative  habits  of  English  houses  will  lead  to 
the  name  being  retained,  while  the  capital  may  have  been  withdrawn- 
Even  the  ratings  of  firms  in  reference  books  may  be  kept  as  before, 
nlthough  a  vital  change  has  taken  place  in  their  composition  and  capital. 

The  true  position  for  the  Canadian  exporter  to  take  is,  that  if  the 
buyer  abroad  wants  credit,  he  should  get  it  in  his  own  country;  an  idea 
which  is  undoubtedly  reasonable,  and  has  led  to  the  habit,  now  general  in 
many  lines  of  export  trade,  of  attacliing  bills  of  lading  to  bills  of 
exchange,  and  requiring  the  bill  to  be  paid  before  the  security  is  given, 
up.     All  this  will  be  fully  considered  later.- ^ 

With  regard  to  the  credit  given  by  retailers,  a  distinction  must  be 
made  between  those  in  the  city  and  the  country. 

The  accounts  of  respectable  families  in  cities  are  seldom  a  source  of 
loss,  though  some  householders  do  occasionally  run  up  tradesmen's  accounts 
to  an  unreasonable  extent.  Such  accounts,  however,  seldom  give  rise  to 
discountable  bills;  and  if  such  are  presented  to  a  banker  he  will  generally 
do  well  to  decline  them. 

But  the  credit  given  by  country  storekeepers  to  farmers  rests  on 
different  grounds.  The  farmer  has  property  which  can  be  seen,  both  real 
and  personal,  and  though  often  slow,  is  generally  sure.  The  danger  with 
farmers'  accounts  is  not  so  much  of  ultimate  loss,  as  of  their  degenerating 
into  what  bankers  call  "lockups."  A  storekeeper  with  his  books  full  of 
such  accounts  is  apt  to  become  as  slow  as  the  farmer  himself.  His 
interest  account  therefore  becomes  heavy  and  tends  to  eat  up  his  profits. 
He  is  made  also  to  feel  in  times  of  pressure  that  his  account  is  unde- 
sirable. In  dealing  with  farmers,  storekeepers  need  to  be  careful  to 
consider  whether  their  customer  is  owner  or  tenant;  and  if  owner, 
whether  his  land  is  free  of  encumbrance  or  not.  The  utmost  limit  of 
credit  to  a  farmer  should  be  the  amount  of  one  season's  supplies.  When 
an  account  gets  beyond  this,  it  should  be  stopped.  Xo  consideration  of 
ease  in  getting  bank  discount  should  prevail  to  alter  this  rule. 

23  It  is  to  be  said,  however,  that  the  houses  in  Great  Britain  witli  wlioni  our 
timber  exporters  deal  are  almost  invariably  of  a  high  class,  both  in  wealth  and 
credit,  merchants  of  long  standing  and  unblemished  antecedents,  who  have  never 
failed  to  meet  obligations  in  the  worst  of  times.  Yet  it  is  singular  how  cautiously 
English  Vjankors  speak  when  asked  an  opinion  of  even  these.  Circumstances  prove 
that  there  is  a  good  leason.  A  timber  merchant  in  England  who  had  maintained 
a  high  iiosition  through  a  long  course  of  years  became  embarrassed  and  stopped 
payment,  with  heavy  loss  to  his  creditors.  To  the  astonishment  of  them  all.  his 
bankers  included,  it  was  found  that  he  had  engaged  in  reckless  speculation  in  an 
article  that  had  nothing  to  do  with  his  trade,  which  speculation  going  wrong,  had 
resulted  In  such  heavy  loss  as  to  ruin  him.  This  affair  was  the  occasion  of  con- 
siderable loss  to  Canadian  firms  who  had  dealt  with  him   continuously  for  years. 


THE    SUCCESSFUL    MERCHANT.  6l 

Economy  in  Business  Expenditures. 

This  is  another  condition  of  success.  By  this  is  not  meant  mere 
saving  and  cheese-paring.  Economy  primarily  means  management,  as 
the  derivation  of  the  word  implies  to  begin  with;  careful  calculation  of 
what  charges  can  be  afforded  according  to  the  size  of  the  business.  The 
primary  charge  in  a  mercantile  business  is  the  rent  of  the  warehouse.  To 
rent  too  large  a  store  is  a  serious  mistake.  But  it  is  poor  economy  to  rent 
one  too  small:  or  that  is  situated  on  a  back  street,  or  is  badly  lighted,  or 
badly  laid  out  for  business.  Saving  of  this  kind  will  be  far  more  than 
offset  by  loss  of  customers.-' 

The  salaries  of  clerks,  salesmen  and  travelers  is  another  item  of 
even  more  importance  than  the  other.  Here  again  it  is  poor  economy  to 
employ  an  inferior  class  of  men.  Such  are  apt  to  injure  the  business 
by  inefficiency.  More  men,  too,  are  required  to  do  a  certain  amount  of 
business  when  they  are  below  a  proper  standard.  Three  competent  men 
will  do  as  much  work  as  four  of  an  inferior  class,  and  while  they  cost 
no  more  in  the  aggregate,  they  help  to  build  up  the  business  by  wise 
attention  to  the  wants  of  customers.  A  merchant  will  do  well  to  have 
young  men  about  him  who  are  undergoing  training  in  the  methods  of  the 
business.  This  tends  to  economy,  but  must  not  be  carried  too  fai,  as  no 
warehouse  or  office  can  be  carried  on  well  when  there  are  too  many 
juniors  in  it. 

Closely  connected  M'ith  this  matter  of  employees  and  making  the 
most  of  their  capacity,  is  that  of  the  treatment  of  the  seniors.  Some  of 
these,  although  they  grow  in  years,  and  can  be  more  and  more  trusted, 
do  not  develop  business  capacity.  Men  of  this  kind  have  their  value;  as 
they  save  the  principal  much  anxiety,  and  need  no  supervision.  They  can 
also  be  useful  in  the  training  of  juniors.  They  gradually  therefore  grow 
up  to  the  position  of  old  servants  of  the  house,  who  have  a  comfortable 
salary  and  are  contented  with  it,  on  whom  reliance  can  be  placed  and 
who  never  aspire  to  anything  beyond.  It  is  always  good  economy  to  treat 
such  servants  well. 

But  there  are  others  who  develop  a  capacity  for  business.  Such  as 
these  not  only  work,  but  think.  They  suggest  improvements  and  economies. 
They  calculate  how  much  things  cost,  and  sometimes  find  out  where  they 
can  be  bought  clieaper.  Such  employees  as  these  should  be  noted  and 
encouraged,  and  sometimes  taken  in  as  partners. 

It  is  thus  that  the  traditions  of  a  house  are  preserved  from  generation 
to   generation,   the   firm   going   on   doing   service   to   the   community   and 

24  It  need  scarcely  be  pointed  out  that  the  rent  of  a  store  is  a  charge  upon 
•the  business,  even  when  the  premises  are  owned  by  the  firm.  And  in  an  adjust- 
ment of  accounts,  or  stock-taking,  rent  should  be  charged  as  part  of  the  annual 
expense  of  business  exactly  as  if  it  were  paid  to  an  outside  person.  Where  the 
business  belongs  to  one  person,  and  he  owns  the  warehouse  or  store,  he  is  deluding 
himself  as  to  the  expense  of  the  business  if  he  omits  to  charge  it  with  rent,  and 
ihe  is  of  course  deceived  as  to  the  percentage  of  increase  to  charge  on  his  goods. 


62  BANKING    AND    COMMERCE. 

securing  wealth  for  its  niouibcrs,  inaiiy  cxanijiles  of  wliidi  may  be  secrr 
on  both  sides  the  Atlantic,  but  especially  in  Great  Britain. == 

Insurance. 
Another  item  of  expenditure,  and  one  in  which  serious  mistakes  are 
made,  is  that  of  insurance.  This  will  be  fully  treated  of  hereafter.  It 
may,  however,  be  noted  in  this  connection  that  insurance  is  as  reasonable 
a  charge  as  rent  and  taxes,  and  if  business,  as  carried  on,  will  not  bear 
the  expense  of  insurance,  there  is  something  wrong  with  the  business. 

Interest  and  Discount. 

Another  item  of  expense  which,  in  some  cases,  is  the  most  serious: 
of  all,  is  interest  and  discount.  Few  firms  are  in  condition  to  conduct 
their  business  without  bank  loans  or  discounts  at  all.  But  there  is  a 
reasonable  use  of  bank  credit,  and  an  imprudent  use.  "When  a  wholesale 
merchant's  line  of  discounted  paper  averages  more  than  one-fourth  of 
his  annual  sales,  it  is  generally  a  sign  that  his  credit  to  customers  is  too 
long,  or  that  he  does  not  collect  sharply,  or  that  he  is  too  easy  in  renew- 
ing. But  when,  in  addition  to  discounted  paper,  he  borrows  directly  and 
regularly  from  his  banker,  he  has  reason  to  revise  the  whole  methods  of 
his  business.  Bank  credit  to  some  men  is  a  dangerous  luxury.  Such 
loans  may  serve  a  useful  purpose,  provided  they  never  amount  to  more 
than  one-fifth  of  the  average  line  of  discounted  paper  and  that  they 
never  extend  beyond  one  or  two  months.  But  when  such  loans  are 
required  constantly,  and  exceed  the  amount  above  named,  it  is,  as  a  rule,. 
a  sure  sign  that  the  credit  department  of  the  house  is  loosely  managed, 
or  that  it  is  carrying  too  much  stock. 

When  times  of  difficulty  set  in,'  and  the  general  average  of  failures 
rises,  the  pressure  will  show  itself  in  a  tendency  to  require  more  of  this 
kind  of  bank  credit.  But  this  state  of  things  is  best  met,  not  by  taking- 
more  credit,  but  by  curtailing  the  business.  As  to  the  interest  account 
of  a  merchant  in  agricultural  products,  it  will  not  amount  to  more  than 
one-third  or  one-half  of  one  per  cent,  on  the  total  sales,  if  the  business 
is  as  active  as  an  exporter's  should  be.  But  should  such  products  be  held 
month  after  month,  in  our  long  winters,  interest  and  charges  will  almost 
certainly  swallow  up  the  profit,  even  of  an  ordinary  rising  market. 

25  A  mistake  has  sometimes  been  made  by  the  head  of  a  commercial  liouse 
who  has  one  or  more  sons  growing  up,  whom  he  naturally  desires  to  succeed  hinr 
in  business.  While  they  are  growing  up  one  or  more  of  his  employees  are  devel- 
oping a  capacity  for  management;  yet  he  hesitates  to  take  them  into  partnership, 
fearing  they  may  displace  members  of  his  own  family.  The  result  often  is,  that 
these  employees  leave  the  house,  enter  jnto  business  for  themselves,  and  be- 
come serious  rivals.  If  the  sons  prove  to  have  managing  capacity,  the  firm  may 
not  ultimately  be  damaged.  But  if  not,  the  chances  are  that  a  business  founded 
and  maintained  by  the  father  may  disappear  under  the  Incainicity  of  the  sons. 
It  Js,  therefore,  wise  to  keep  managing  capacity  in  the  firm,  even  if.  under  such 
a  regime,  sons  have  to  become  little  more  than  sleeping  partners.  The  prevailing 
tendency  to  convert  firms  Into  joint-stock  companies  affords,  however,  an  easy 
method   of  dealing  with   this  state   of  things. 


THE    SUCCESSFUL    MERCHANT.  63 

Advertising. 

There  are  otlicr  items  of  expense,  sucli  as  advertising,  whicli  every 
merchant  must  think  out  for  himself,  for  no  general  rules  can  be  laid 
down,  except  this,  that  advertising  should  be  in  a  proper  medium,  that 
it  should  be  arranged  so  as  to  attract  attention,  and  that  it  should  be 
changed  from  time  to  time  so  as  not  to  become  monotonous.  In  the  nature 
of  things  some  kinds  of  business  depend  more  on  advertising  than  others. 
Those  who  deal  in  articles  that  are  constantly  changing  must  bring  their 
novelties  before  the  public;  on  the  other  hand,  those  who  deal  in  staple 
goods  with  a  limited  range  of  customers,  and  where  the  price  is  a  matter 
of  market  quotations,  such  as  grain,  etc.,  never  need  to  advertise  at  all. 

But  in  the  general  matter  of  charges  and  expenses,  when  they  have 
been  arranged  so  as  to  comport  with  the  size  of  the  business,  the  thing 
to  be  kept  constantly  in  view  is  to  get  good  value  for  the  expenditure, 
whether  of  rent,  salaries,  insurance,  advertising,  or  what  not. 

Personal  Drawings. 

It  goes  without  saying  that  personal  drawings  from  the  firm  and 
personal  expenditures  should  be  on  an  economical  scale  also.  This  is  a 
matter  requiring  careful  adjustment  where  there  are  two  or  more  part- 
ners, and  careful  consideration  where  there  is  only  one  proprietor.  The 
amount  to  be  drawn  is  usually  set  forth  in  the  deed  of  partnership  and 
should  obviously  be  on  a  scale  that  will  allow  a  considerable  margin 
between  drawings  and  profits.  But  in  case  the  amount  is  for  any  reason 
exceeded  by  one  or  more  partners,  the  amount  of  the  excess  should  be 
by  no  means  entered  as  among  the  ojien  accounts  due  to  the  firm.  This 
is  a  most  delusive  practice  and  has  not  seldom  been  the  means  of  deceiv- 
ing a  firm's  bankers.  Right  and  proper  it  is  between  partners  to  keep 
accounts  to  show  how  the  members  of  the  firm  stand  to  each  other ;  but 
for  a  firm  to  enter  amongst  its  available  assets  sums  that  are  due  by  one 
member  to  the  rest,  and  to  render  an  account  to  a  creditor  in  that  shape, 
is  a  proceeding  that  borders  upon  fraud.  This  practice  is  particularly 
dangerous  when  a  partner,  by  arrangement  with  the  other  member  of  the 
firm,  is  allowed  to  draw  out  a  considerable  sum,  possibly  to  build  him- 
self a  house,  or  enter  on  a  speculation.  The  real  capital  of  the  firm  may 
be  largely  depleted  in  this  way  without  its  being  apparent  in  their  state- 
ments. 

Pkogressiveness   anu    Courtesy. 

In  these  days  of  increasing  competition  where  business  is  apt  to 
assume  the  form  of  a  contest  and  only  the  fittest  survive,  it  is  essential 
that  the  principals  of  a  firm  shall  be  constantly  on  the  watch  to  note  new 
developments,  new  markets,  new  methods,  new  economies,  new  styles  of 
goods,  new  methods  of  transportation.  All  the  world  is  rapidly  becoming 
one  country,  and  the  successful  merchant  will  keep  an  eye  upon  whatever 
is  going  on  that  bears  upon  his  business. 


64  BANKING    AND    COMMERCE. 

In  dealing  witli  his  customers  a  merchant  will  observe  the  maxim, 
"Civility  costs  nothing,  but  is  worth  a  good  deal."  Many  a  merchant 
spoils  his  trade  by  a  deficiency  in  this  respect.  He  is  impatient,  and  if 
his  customers  don't  like  the  goods  he  is  showing  them,  he  will  not  take 
the  trouble  to  show  them  something  else.  True,  a  merchant  sometimes 
knows  what  will  suit  a  customer  better  than  does  the  customer  liimself. 
But  it  is  bad  policy  to  say  so,  or  to  show  that  he  thinks  so.  A  dry 
goods  merchant  should  make  a  practice  of  systematically  clearing  out 
all  goods  that  are  passe,  or  becoming  so.  That  was  another  of  Mr. 
Stewart's  cardinal  rules.  He  made  a  point  of  having  nothing  but  salable 
goods  on  his  shelves.  But  there  is  a  great  temptation  to  hang  on  to  stock 
that  has  once  been  bought,  and  some  men  constantly  do  it,  hoping  against 
hope  that  it  will  be  sold  in  ordinary  course.  It  is  an  unpleasant  thing 
to  sell  goods  at  a  loss,  but  it  is  often  true  economy  in  the  end.  The 
process  of  weeding  will,  of  course,  be  carried  on  by  the  principal,  so  as 
to  ensure  that  good  plants  may  not  be  piilled  up  with  the  weeds. 

Value  of  CAhEFUi,  Accounting. 

The  final  element  of  business  success  is  the  keeping  of  accurate 
accounts,  and  the  systematic  balancing  of  them  once  a  year  at  least.  It 
has  been  said  of  many  a  merchant,  but  perhaps  more  frequently  of  a 
manufacturer,  that  he  does  not  know  what  his  goods  cost,  and  therefore 
he  is  deluding  himself  during  the  whole  time  that  he  is  selling  them. 
The  only  efficient  check  upon  this  is  the  careful  taking  of  stock,  and 
periodically  balancing  of  books.  In  stock  taking,  when  goods  on  hand 
are  written  down  to  what  the  merchant  could  buy  them  at  for  cash, 
or  what  he  would  be  willing  to  give  for  them;  when  all  accounts  are  put 
at  their  collectible  value,  and  written  olf  if  they  have  none;  and  when 
due  allowance  has  been  made  for  depreciation  in  fixed  property,  a  mer- 
chant M'ill  sometimes  be  astonished  to  find  that  he  has  not  made  half  the 
profit  he  had  anticipated,  or  perhaps  none  at  all.  This  being  so,  he  will 
naturally  endeavor  to  ascertain  where  the  leak  is,  overhauling  every 
department  of  his  business  for  the  purpose.  He  will,  after  this,  buy 
more  carefully,  sell  more  closely,  economize  expenditures,  collect  more 
jiharply,  and  borrow  less  money — thus  laying  a  foundation  for  a  satis- 
factory result  in  future. 

It  may  be  objected  to  this  that  many  a  man  has  prospered  and  made 
a  competency  in  Canada  who  conducted  his  business  by  "rule  of  thumb" 
and  never  made  out  a  balance-sheet  in  his  life.  There  have  been  cases, 
no  doubt,  where  great  natural  shrewdness  and  ability  in  buying  and  sell- 
ing have  brought  out  such  results.  But  these  were  exceptions,  even  in 
the  early  days  of  the  country.  But  now  that  population  has  increased 
and  competition  increased  with  it,  the  "rule  of  thumb"  must  perforce 
give  way  to  the  keeping  of  accurate  accounts. 


CHAPTER  X. 
MANUFACTURING. 

Early  Developments  of  Manufacturing — Suitable  Locations — 
Bonuses — The  Successful  Manufacturer — Capital  Required — 
Proper  Machinery — What  Goods  to  Make  and  to  Whom  They 
Are  to  Be  Sold — Consignments — Selling  Agents — Sales  to 
Wholesale  Merchants — Insurance. 

THE  subject  of  Manufacturing,  apart  from  the  petty  developments  of 
a  primitive  condition,  at  once  opens  up  this  fundamental  question, 
what  natural  capacity  or  suitableness  exists  in  any  given  country, 
or  given  tract  of  country,  for  the  production  of  goods  by  manufacturing 
processes?  The  answer  to  this  question  verges  upon  the  problems  that 
gather  round  the  controversy  between  free  trade  and  protection.  These 
problems  it  is  not  within  the  scope  of  this  work  to  consider;  suffice  it  to 
state,  what  is  universally  acknowledged,  that  the  primary  conditions  of  the 
suitability  of  any  country  for  manufacturing  are  two,  the  possession  of 
power,  and  the  possession  (or  possibility  of  acquiring  at  a  competitive 
price)  of  raw  material.  There  are  secondary  considerations,  such  as  a 
supply  of  suitable  labor,  and  the  proximity  of  markets,  but  the  foregoing 
are  fundamental. 

"SMiere  these  two  are  found  together,  manufacturing  is  most  natural, 
and  if  efficiently  carried  on,  most  profitable.  Where  only  one  of  them  is 
found,  the  possibility  of  profitable  manufacturing  depends  on  the  cost 
of  bringing  the  two  into  conjunction.  Where  neither  of  them  is  found, 
profitable  manufacturing  is,  generally  speaking,  hopeless. 

Early  Developments  of  Manufacturing. 

The  earlj-  developments  of  manufacturing  almost  invariably  arose 
around  water  powers.  Thus  it  was  with  nearly  all  the  manufacturing 
towns  of  England.  The  streams  that  flowed  down  from  the  central  moor- 
lands of  the  North  gave  rise  to  the  falls  and  powers  that  were  the  origin 
of  the  manufactures  of  Lancashire  and  Yorkshire.  Thus  it  was  also  in 
Scotland,  in  central  P^ngland,  in  New  England,  and  notably  with  the 
powers  arising  from  the  great  rivers  of  Canada,  and  of  the  United 
States. 

The  development  of  coal  mining  introduced  a  new  element  into  the 
question,  which  element,  in  most  cases,  has  become  the  dominant  one. 
Except  in  a  few  centres  where  water  powers  are  found  of  prodigious 
magnitude  and  continuity— such  as  Ottawa,  INIinneapolis,  and  Kewatin, 
the  power  of  coal  has  not  only  become  supplementary  to  the  power  of 
5 


66  BANKING    AND    COMMERCE. 

water,  but  has  almost  supplanted  it.  But  even  in  localities  where  water 
power  has  fallen  almost  into  disuse,  and  great  manufacturing  cities 
are  fouiid  at  the  present  day,  whose  engines  are  almost  wholly  run  by 
the  power  of  coal,  it  will  generalh'  be  found  that  some  water  power 
was  the  beginning  of  its  development.  Thus  it  was  that  several  little 
converging  moorland  streams  in  Yorkshire  were  the  origin  of  the  towu 
of  Sheffield,  though  the  power  derived  from  them  is  now  infinitesimally 
small.  The  little  river  Idle,  which  is  humorously  said  to  be  tiie  hardest 
working  stream  in  the  world,  flows  down  the  western  sides  of  these  same 
moorlands,  and  was  the  origin  of  many  of  the  thriving  communities  of 
Lancashire,  Manchester  included.  Yet  hard  as  the  little  stream  works, 
its  total  power  and  that  of  other  streams  like  it  is  a  very  small  factor  in 
the  total  production  of  the  district. 

Nature  itself,  that  infallible  mother  of  all  forces,  has  indicated  with 
certainty  where  manufactures  may  profitably  flourish.  And  it  is  one  of 
the  most  striking  developments  of  these  days  that  water  power  is  asserting 
itself  again  as  a  generator  of  Electricity. 

Suitable  Locations. 

But  though  a  given  country,  as  a  whole,  may  have  the  natural  elements 
of  manufacturing  success,  it  is  not  every  locality  that  is  suitable  for 
every  kind  of  manufacture.  Other  elements  have  to  be  considered,  and 
particularly  the  important  factors  of  labor,  economical  supply  of  raw 
material,  and  the  ease  of  reaching  a  consuming  market.  What  particular 
manufacture  will  suit  a  certain  locality  has  Anally  to  be  determined  by 
these.  It  has  become  plain  that  flour  milling  suits  Minneapolis,  saw 
milling  the  Ottawa  Valley,  cotton  manufactures  New  England,  iron  and 
steel  Pennsylvania.  Cotton  spinning  flourishes  in  Lancashire,  but  an 
attempt  to  introduce  it  into  Yorkshire  was  a  signal  failure.  Montreal 
has  remarkable  facilities  for  a  variety  of  manufactures,  and  a  variety 
of  them  are  therefore  found  in  that  city  and  neighborhood.  So,  by  a 
natural  process  of  development,  each  of  the  manufacturing  towns  of 
Canada  has  come  to  be  what  it  is;  and  the  best  has  come  to  be  made 
both  of  our  coal  mines  and  the  water  powers  of  our  smaller  rivers,  such 
as  the  Trent,  Otonabee,  and  Grand  in  Ontario,  and  the  St.  Francis 
and  the  Chaudiere  in  Quebec.  And  what  is  true  of  Canada  is  true 
of  the  United  States  on  a  much  larger  scale.  In  a  forest  covered  country, 
as  most  of  Canada  was  originally,  the  most  natural  form  of  manufactur- 
ing was  sawing  up  the  wood  of  the  forest  into  lumber,  or  hewing  it  into 
square  timber.  Both  have  been  the  source  of  great  profit  at  one  time, 
both  have  caused  great  losses  at  another;  the  profit  and  loss  having 
been  generally  traceable  to  knowledge  of  the  business  or  lack  of  it;  but 
sometimes  to  the  chances  and  changes  of  winter  and  spring.  But  too 
much  or  too  little  snow  in  the  woods,  or  too  much  or  too  little  water  in  the 
river,  may  spoil  the  labor  of  a  whole  season. 

But  a  person  Avho  has  been  successful  as  a  maker  of  timber  sometimes 


MANUFACTURING.  67 

turns  his  attention  to  saw  milling.  He  is  then  confronted  with  new 
conditions  of  which  he  has  had  no  experience,  and  ruinous  losses  have 
followed  the  experiment.  IMills  were  built  where  the  best  conditions  did 
not  exist,  and  profit  frittered  awa}'  in  cost  of  hauling. 

The  difl'erence  between  a  mill  which  can  be  worked  properly  and 
one  thai  will  entail  constant  loss  may  be  only  a  difference  in  locality 
of  half  a  dozen  miles.  To  locate  a  mill  on  one  side  of  a  stream  or  the 
other,  or  on  the  eastern  side  of  a  hill  instead  of  the  west,  may  make  the 
diiFercnce  to  the  owner  of  a  fortune  or  ruin. 

The  same  principle  applies  to  another  natural  industry  of  Canada, 
tJie  flour  mill;  a  business  that  has  undergone  a  striking  development 
corresponding  to  the  development  of  the  country.  The  gristing  mill  of 
former  days,  often  buried  in  the  woods,  picturesque  in  appearance, 
with  the  rudest  description  of  equipment,  has  been  necessarily  replaced 
by  the  substantial  mill  of  these  times,  contiguous  to  a  railway  or  naviga- 
tion, equipped  with  modern  machinery  and  perfect  appliances  for  power 
and  transport. 

At  quite  an  early  period  there  followed  Avoolen  mills,  tanneries,  and 
pork  factories;  and,  somewhat  later  on,  breweries,  distilleries,  coal 
mines,  iron  works,  fish-curing  establishments  and  implement  manu- 
factories, paper  mills,  etc.,  all  of  which  are  indigenous  to  the  soil,  and 
work  up  the  natural  products  of  the  country  or  its  contiguous  waters. 
In  all  these,  as  in  flour  milling,  there  have  been  enormous  developments 
from  the  past  to  the  present;  and  in  all  of  them  much  money  has  been 
both  made  and  lost. 

But  there  arc  now  in  the  country  manufactures  of  a  different  descrip- 
tion, which  have  yet  attained  a  high  degree  of  development  and  give 
employment  to  a  large  number  of  artisans.  These  differ  from  the  fore- 
going, inasmuch  as  the  raw  material  they  work  up  is  not  a  product  of  the 
country.  They  owe  their  inception  and,  in  part,  their  continuance,  to 
legislative  conditions,  for  which  reason  it  is  considered  by  some  that  they 
should  never  have  been  set  on  foot,  and  have  no  right  to  be  continued. 
(Many  of  them,  however,  have  very  fine  water  power.)  These  manufac- 
tures, however,  exist,  and  their  development  illustrates  the  importance  of 
locality  as  much  as  those  before  mentioned.  Some  mills  have  never  been  a 
iuccess,  and  if  they  had  been  owned  by  private  individuals  the  parties 
would  long  ago  have  gone  into  bankruptcy.  In  other  cases,  after  the 
difficulties  that  attend  all  new  enterprises  had  been  overcome,  success  has 
been  constant  and  remarkable.  All  of  them  demonstrate  the  points 
insisted  upon,  viz.,  that  an  ample  supply  of  power,  either  of  water  or 
coal,  an  easily  available  supply  of  raw  material,  good  communications 
both  to  and  from  the  factory,  and  command  of  efficient  labor,  are  the 
foundations  of  success,  without  which  the  largest  expenditures,  the  most 
efficient  machinery,  and  most  economical  management  will  be  in  vain. 

There  must,  in  the  nature  of  things,  at  some  time  be  a  pioneer  estab- 
lishment in  the  case  of  every  manufacture  in  every  locality.     It  is  not 


68  BANKING    AND    COMMERCE. 

seldom  the  case  that  a  large  amount  of  money  is  lost  while  the  experiment 
is  in  progress,  even  if  success  be  attained  ultimately.  Some  of  the  well- 
established  manufactures  of  Canada  were  commenced  by  men  who  were 
not  discouraged  by  losses  at  the  outset.  They  persevered,  but  not  on 
the  same  lines.  They  tried  experiments,  found  out  defects,  introduced 
new  methods.  Thus,  sometimes  very  slowly  at  first,  but  surely,  they  dis- 
covered the  art  of  not  only  making  goods  but  making  money."'* 

Bonuses. 

Closely  conected  with  the  matter  of  locality  is  the  practice,  once  so 
common  in  Canada,  of  municipalities  offering  inducement  to  manu- 
facturers to  establish  their  business  amongst  them.  This  practice  is 
unknown  in  Great  Britain,  and  it  has  been  of  doubtful  advantage  to  this 
country.  For  it  is  certain  that  unless  a  manufacturing  business  is  estab 
lished  in  a  proper  locality  it  cannot  permanently  succeed. 

The  great  centres  of  manufacturing  industry  in  Great  Britain  have 
not  become  so  by  chance,  or  by  means  of  municipal  bonuses,  but  because 
of  their  facilities.  Why  are  they  all  found  in  the  North,  or  in  other 
localities  contiguous  to  hills  .^  Jt  is  because  of  the  water  power  originally 
found  there.  In  the  early  days  of  development,  when  a  district  is  only 
imperfectly  known  except  to  the  people  therein,  these,  knowing  the 
district  to  have  advantages,  may  reasonably  call  attention  to  them,  and 
off'er  inducements  to  a  manuacturer  to  establish  himself  amongst  them 
rather  than  elsewhere.  These  inducements  will  off'set  the  risk  of  building 
and  bringing  capital  to  a  place  hitherto  unknown.  Its  success  as  a  seat 
of  manufacture  has  to  be  j^roved,  and  it  may  take  years  to  accomplish 
it.  Remission  or  reduction  of  taxes,  or  an  actual  bonus  in  money,  may 
therefore  be  off"ered  without  violating  any  economic  principle.  If  the 
place  proves  to  have  the  advantages  claimed  and  the  parties  receiving  the 
bonus  have  capital  and  capacity,  the  experiment  will  succeed,  and  other 
enterprises  follow.     Then  bonuses  should  cease. 

But  when  the  people  of  a  town,  simply  out  of  a  spirit  of  ambition, 
or  what  is  called  enterprise,  seek  to  draw  manufactures  to  a  place  without 
natural  advantages,  the  effort  is  foredoomed  to  failure.  Any  manu- 
facturer, looking  round  for  a  spot  in  which  to  commence  operations, 
will  beware  of  being  tempted  by  a  bonus  to  an  undesirable  locality. 
Better  borrow  the  money  at  ten  per  cent.,  supposing  it  necessary  to 
borrow  at  all,  and  settle  in  a   desirable  locality,   than   get  a  supply  of 

26  It  Is,  as  has  been  observed,  foreign  to  the  purpose  of  this  treatise  to  dis- 
cuss the  economic  questions  connected  with  these  latter  lines  of  industry.  But 
it  may  be  observed,  and  it  deserves  to  be  noted,  that  even  such  industries  may 
be  consid(Med  indigenous,  at  any  rate  to  this  extent,  that  the  raw  materials  of 
several  of  them  are  produced  on  this  continent.  If  not  in  this  country,  and  that 
we  have  the  means  of  economical  production  in  our  water  power,  and  access  to 
coal  mines;  also  in  a  supply  of  suitable  labor  and  of  economical  distribution  in 
our  great  lines  of  railway  and  river  transiiortation.  And  it  is  an  undmibtod  fact 
that  much  of  the  water  power  which  nature  has  given  us  would  he  wasted  if 
these  enterprises  ceased  to  exist. 


MANUFACTURING.  o9 

money  for  nothing  in  an  undesirable  one.  And  tlie  people  of  a  niuniei- 
pality,  under  such  circumstances,  will  learn  by  unpleasant  experience  that 
their  money  has  been  wasted  by  reason  of  the  forced  enterprise  never 
taking  root.-'^ 

27  The  writer  remembers  well  an  instance  illustrating  the  importance  of  local- 
ity that  transpired  in  a  certain  town  in  England.  The  district  is  particularly  well 
adapted  for  iron  manufactin-es,  and  they  have  flourislicd.  there  for  generations. 
But  many  years  ago  some  capitalist  conceived  the  idea  of  developing  the  cotton 
industry  there  also.  There  were  hundreds  of  cotton  mills  fifty  miles  off  over  a 
range  of  moorlands,  why  could  not  the  industry  be  domiciled  in  his  own  town? 
The  capitalist  conceived  there  was  no  reason,  and  built  and  equipped  a  mill.  But 
it  was  found  impossible,  year  after  year,  to  make  cotton  goods  at  a  profit;  al- 
though, not  a  hundred  yards  away,  a  great  iron  foundry  and  rolling  mill,  fed  by 
the  same  water  power,  were  making  large  amounts  of  money  for  their  proprietors. 
The  reason  was  that  in  the  era  before  railways  the  range  of  hills  aforesaid  pre- 
sented an  insurmountable  barrier.  The  cost  of  bringing  raw  material  to  the  town 
by  carting  it  over  the  moorlands  and  carrying  back  many  of  the  finished  goods 
over  the  same  hills,  swallowed  up  all  the  profits  of  the  mill.  After  years  of  hope- 
less struggle  and  heavy  loss  of  capital,  the  factory  was  closed  and  dismantled. 
1  well  remember  its  broken  windows,  dilapidated  flumes,  and  ruined  dam,  standing 
out  as  an  object  lesson  of  misplaced  enterprise.  Canada,  too,  has  some  object 
lessons  of  the  same  kind.  But  she  has  seen  magnificent  examples  of  success  when 
natural  conditions  have  been  duly  observed,  and  business  principles  brought  to 
bear. 


CHAPTER   XI. 
THE  SUCCESSFUL  MANUFACTURER. 

Capital      Kequircd* — Proper      ^Iaciiixery — Consignments — Selling 
Agents — Sales  to  Wholesale  Merchants — Insurance. 

IT  may  at  first  sight  seem  unnecessary  to  make  a  distinction  between 
the  successful  merchant  and  the  successful  manufacturer.  But  the 
points  of  difference  are  important  enough  to  make  it  desirable. 

Almost  all  that  has  been  said  respecting  a  successful  merchant  applies 
also  to  a  manufacturer;  but  all  that  applies  to  a  manufacturer  does  not 
apph'  to  a  merchant.  In  using  the  word  "manufacturer,"  it  should  be 
understood  that,  in  this  chapter,  a  flour  miller,  a  tanner,  sugar  refiner, 
saw  miller,  pork  packer,  and  hewers  of  squared  timber  are  included. 
They  all  produce  goods  by  a  manufacturing  process,  though  they  are 
not  generally  called  "manufacturers." 

To  be  a  successful  manufacturer  implies  at  the  outset  that  the  goods 
produced  are  such  that,  speaking  generally,  there  will  be  some  certain 
demand  for  them.  There  are  goods  which  are  subject  to  the  changes 
of  fancy  and  fashion :  it  is  then  of  primary  importance  for  a  manu- 
facturer to  watch  tliese  changes  and  regulate  production  accordingly. 
There  are  others  for  which  the  demand  is  certain. 

But  though  a  man  may  be  sure  of  selling  the  goods  he  produces, 
it  by  no  means  follows  that  he  can  always  sell  them  at  a  profit.  A 
manufacturer  may  have  an  imperfect  equipment,  or  insufficient  knowledge, 
or  inadequate  capital,  in  which  case,  so  strenuous  is  modern  competition, 
that  to  make  profit  is  out  of  the  question. 

Capital  Required. 

With  regard  to  capital,  it  is  obvious  that  more  is  required  for  a 
manufacturer  than  for  a  merchant.  A  merchant  buys  the  very  goods 
he  sells;  and  can  generally  buy  them  on  credit;  the  only  immediate  cash 
outla}'  on  them  being  for  freight  and  duties.  He  can  generally  lease 
the  warehouse  in  which  he  does  business.  But  a  manufacturer  can  rarely 
rent  liis  mill  or  factory;  in  fact,  it  is  almost  a  necessity  for  him  to  own  it. 

The  minimimi  capital  on  which  a  manufacturer  can  carry  on  business 
with  ease,  is  that  expended  on  land,  buildings,  plant  and  machinery. 
But  it  is  certainly  desirable  for  a  manufacturer  to  have  some  capital 
beyond  this,  otherwise  he  may  find  himself  seriously  embarrassed,  in 
a  time  of  monetary  pressure.  It  is  only  prudent  therefore  for  him  to 
allow  his  profits  to  accumulate  until  lie  can  look  circumstances  squarely 
in  the  face  no  matter  what  financial  changes  may  transpire. 
70 


THE    SUCCESSFUL    JNIAXUFACTURER.  71 

Proper  JNIaciiinery. 

But,  though  being  in  possession  of  adequate  capital,  it  may  be  safely 
said  that  a  manufacturer  cannot  be  successful  unless  he,  or  a  manager 
under  him,  has  a  faculty  for  machinery,  and  can  tell,  as  by  instinct, 
whether  any  particular  machinery  is  serviceable  and  workable.  This 
faculty,  if  he  has  it,  will  enable  him  to  make  economical  repairs  and  re- 
placements, or  introduce  improvements,  perhaps  peculiar  to  himself.  For 
it  is  a  necessity  for  every  factory  to  adopt  current  improvements  when 
their  merit  has  been  demonstrated.-^ 

Here  it  is  that  tlie  faculty  for  machinery  will  have  its  scope.  It 
will  enable  a  manufacturer  to  judge  whether  the  new  thing  is  a  good 
thing,  and  whether  improvements,  so  called,  will  really  improve;  or 
whether  he  cannot,  by  some  alteration,  make  his  own  machinery  answer  the 
same  purpose.  The  proprietor  of  a  large  flouring  mill,  not  in  Canada, 
once  lost  a  large  sum  of  money  by  hastily  adopting  a  new  method  recently 
patented.  The  mill  was  at  a  standstill  for  some  time  while  the  altera- 
tions were  being  made,  and  its  customers  were  obliged  to  trade  elsewhere. 
But  when  the  mill  started  again,  although  a  great  flourish  of  trumpets 
had  been  made  about  the  new  process,  it  was  found  to  make  no  better 
flour  than  the  old  and  no  cheaper,  and  in  the  end  it  was  abandoned 
altogether. 

What  Goods  to  ISIake,  and  to  WhOiM  They  Are  to  Be  Sold. 

The  question,  however,  now  arises  to  which  all  that  has  been  referred 
to  is  preparatory,  viz.,  what  goods  are  to  be  manufactured,  and  to  tvhom 
and  how  are  they  to  be  sold?  It  is  not  necessary  in  a  treatise  like  this 
to  enter  upon  the  specialties  of  the  many  lines  of  manufacture  estab- 
lished in  the  country.  The  greater  part  of  them  are  of  staple  products. 
But  there  is  this  to  be  said,  that  it  is  highly  conducive  to  success,  even 
in  the  manufacture  of  staples,  for  the  manufacturer  to  make  a  special 
article,  and  to  brand  it  with  his  own  name,  so  that  it  may  have  a  name 
in  the  market,  familiar  to  his  customers  and  the  public.  Unless  he  can 
do  this,  he  will  rarely  make  profit.  There  is  a  general  and  noticeable 
movement  towards  specializing  manufactured  goods,  and  labeling  them 
with  a  name  which  carries  with  it  a  guarantee  of  quality,  even  of  such 
articles  as  flour,  pork,  whiskey,  etc.  The  reputation  once  established, 
the  demand  is  certain,  and,  in  most  cases,  the  profit  is  assured. 

But  in  such  lines  pf  manufactures  as  cottons,  woolens,  boots  and 
5hoes,  rubber  goods,  etc.,  etc.,  many  varieties  are  to  be  found.     Some  of 

28  Not  that  every  new  idea  in  machinery  is  to  be  adopted  as  soon  as  it  comes 
out.  A  thing-  is  not  necessarily  good  because  it  is  new.  The  patent  offices  at 
Washington  and  Ottawa  contain  hundreds  of  models  of  inventions,  and  of  sup- 
posed improvements,  which  turned  out  on  trial  to  be  unworkable.  A  manufacturer, 
therefore,  while  keeping  his  eyes  open  to  what  is  transpiring  in  the  way  of  im- 
provements, will  be  careful  not  to  spend  money  on  what  may  turn  out  to  be  mere 
"fads,"  unless  indeed  he  has  capital  enough  to  enable  him  to  spend  money  in  ex- 
perimenting. 


72  BANKING    AND    COMMERCE. 

these,  too,  are  staple,  hut  others  are  of  the  kind  where  taste  and  fancy- 
have  sway;  such  as  colored  and  fancj'  cottons,  woolens  and  silks.  In 
agricultural  implements  also  a  considerable  clement  of  taste  and  fancy 
has  sway,  and  competition  prevails  as  to  the  quality  of  various  kinds  of 
machines.  For  the  wise  production  of  these  classes  of  goods,  the  same 
instinctive  feeling  of  what  will  suit  the  market  is  required,  that  has  been 
referred  to  in  the  case  of  a  merchant. 

Consignments. 

Passing,  however,  from  the  consideration  of  what  is  to  be  manu- 
factured, to  that  of  how  the  productions  of  the  factory  are  to  be  sold; 
a  wide  field  is  entered  upon,  which  brings  the  manufacturer  into  close 
contact  with  the  banker.  At  the  outset,  questions  arise  as  to  whether 
goods  shall  be  sent  on  consignment,  or  whether  they  shall  be  made  to 
reach  the  merchant  direct;  whether  the  services  of  a  selling  agent  shall 
be  secured,  through  whom  the  whole  product  shall  be  distributed  to  the 
dealer,  or  whether  dealings  shall  be  with  customers  direct. 

With  regard  to  consignments,  it  has  long  come  to  be  regarded  as  an 
unprofitable  method  of  doing  business.  Manufacturers  of  goods  for 
export  have  long  seen  it  necessary  to  establish  such  connection  abroad 
that  they  can  make  sales,  at  definite  prices  and  on  definite  terms  of  time 
and  delivery;  and  will  not  trade  except  for  what  are  called  ''firm  offers." 

Selling  Agents. 
Manufacturers  of  cotton  and  woolens  have,  however,  found  the  con- 
vonience  of  dealing  through  a  selling  agent  who  will  guarantee  sales; 
or  will  accept  himself  against  the  goods  that  pass  through  his  hands. 
It  saves  a  large  amount  of  office  work,  and  seems  also  to  save  a  con- 
siderable amount  of  risk  in  giving  credit  to  a  large  number  of  traders 
scattered  over  the  country.  But  experience  has  proved  that  though 
trouble  and  office  work  are  saved,  the  risk  remains.  The  selling  agent 
himself  takes  the  risk  of  numerous  accounts;  and  in  difficult  times  he 
may  himself  succumb.  Hence  it  has  come  about  that  while  the  services 
of  a  selling  agent  are  retained,  he  is  in  some  cases  relieved  from  the 
responsibility  of  accepting  against  goods,  or  guaranteeing  accounts,  a 
difference  in  remuneration  being  made  accordingly.  The  manufacturer 
then  deals  directly  with  the  customer  so  far  as  collecting  is  concerned, 
and  takes  the  risk  of  giving  credit.  This  arrangement  is  looked  upon 
with  much  more  favor  by  the  banker,  for  obvious  reasons.  The  practice 
of  selling  goods  through  an  agent  is  found  convenient  in  the  case  of 
factories  located  in  country  districts.  The  selling  agent  in  such  cases 
performs  the  service  of  a  well-informed  partner.  Being  resident  in  a 
mercantile  centre,  he  can  give  the  manufacturer  advice  as  to  changes  of 
fancy  and  taste;  and  prevent  him  running  on  undesirable  goods. 


THE    SUCCESSFUL    MANUFACTURER.  73 

Sales  to  Wholesale  Merchants. 

In  most  lines  of  manufacture,  the  natural  course  is  to  sell  to  the 
wholesale  merchant.  In  this  case  the  manufacturer  will  have  large 
accounts  in  his  books,  especially  in  the  timber  trade,  where  it  is  a  common 
practice  to  sell  the  whole  product  of  the  year  to  one  mercantile  house. 
This  involves  exceptional  risk,  and  a  prudent  banker  will  be  careful  as 
to  discounting  bills  of  the  magnit-jde  called  for  unless  a  lien  is  preserved 
on  the  goods  until  payment.  But  throughout  all  these  selling  arrange- 
ments, where  paper  is  required  to  be  taken,  a  prudent  manufacturer  will 
always  keep  in  touch  with  his  banker,  as  to  n^hom  to  credit,  and  to  what 
amount. 

The  last  course  open  to  a  manufacturer  is  to  sell  to  the  retailer. 
This  is,  or  certainly  was,  a  common  practice  in  Great  Britain,  but  it  has 
not  taken  root  here,  except  indeed  in  the  case  of  the  departmental  city- 
stores,  whose  purchases  are  on  the  same  scale  as  those  of  a  wholesale 
merchant,  and  are  treated  as  such  by  a  manufacturer.  It  is  evidently 
not  desirable  for  the  manufacturer  to  sell  to  the  ordinary  retailer,  for  in 
that  case  he  will  endanger  his  trade  with  wholesale  houses.^" 

Insurance. 
In  the  matter  of  insurance  there  is  even  a  greater  necessity  for  a  care- 
ful outlook;  for  the  damage  to  the  business  of  a  manufacturer  by  fire  is 
usually  far  more  serious  than  to  a  merchant.  It  is  much  more  easy  for  a 
merchant  to  obtain  new  premises  and  a  new  stock  of  goods  than  for  a 
manufacturer  to  replace  his  buildings  and  machinery.     The  fact  that  a 

29  The  method  of  disposing  of  staple  export  goods  by  consignment  was  for- 
merly almost  universal,  but  it  has  led  to  so  many  losses  as  to  have  been  largely 
abandoned.  It  was  an  easy  way  of  doing  business  to  forward  goods  to  a  consignee 
as  fast  as  they  were  made,  and  draw  a  percentage  against  them,  that  percentage 
being  supposed  to  leave  a  margin  to  be  drawn  for  in  future.  The  margin  would, 
in  truth,  be  realized  if  the  goods  struck  a  favorable  market;  and  many  an  exporter 
has  deceived  himself  by  treating  it  as  a  tangible  asset.  But  a  sad  undeceiving  has' 
often  awaited  him  on  the  receipt  of  Account  Sales.  In  many  cases  there  was  a 
balance  against  him  instead  of  to  his  credit,  which  balance  he  was  called  upon  to 
pay.  The  technical  name  for  this  is  "reclamation,"  a  word  which  has  had  an 
ominous  sound  for  many  a  shipper,  and  proved  the  beginning  of  a  downfall.  A 
consignee  when  his  own  acceptances  are  coming  due,  and  markets  are  adverse, 
will  .sometimes  slaughter  his  correspondents'  goods.  An  unscrupulous  consignee, 
indeed,  in  an  advancing  market  has  been  known  to  take  goods  to  his  own  account, 
rendering  a  far  less  favorable  return  than  he  could  afterwards  have  done,  had 
the  goods  been  actually  sold.  There  are,  in  fact,  disadvantages  every  way  in  con- 
signing. The  manufacturer  has  not  the  advantage  of  that  direct  contact  with  the 
buyer  which  is  one  of  the  most  efficient  checks  upon  his  business.  If  he  con- 
signs he  may  not  know  for  weeks  that  his  goods  are  unsuitable  or  badly  manufac- 
tured; whereas,  if  he  sells,  the  buyer  will  tell  him  at  once.  In  the  one  case  he 
will  go  on  making  goods  by  which  he  ultimately  loses  money;  whereas,  in  the 
other  he  will  at  once  change  his  methods,  overhaul  his  machinery,  or  buy  more 
suitable   raw    material,    and    so    work    round    to   a   profitable   style    of   business. 

It  may  be  thought  difficult  to  arrange  sales  with  buyers  across  the  sea,  but 
It  is  undoubtedly  for  every  exporter's  interest  to  open  communication  with  buyers, 
and  to  visit  the  centres  of  consumption  abroad,  and  in  these  days  of  swift  com- 
munication   it  is  becoming  easy   to  do   it. 


74  BANKING    AND    COMMERCE. 

manufactory  is  usually  well  built,  or  that  it  has  unusually  good  fire  pro- 
tection, should  never  induce  a  manufacturer  to  diminish  insurance.  He 
gets  the  benefit  of  his  good  appliances  in  a  lower  rate.  But  to  diminish 
the  amount  is  apt  to  prove  a  serious  mistake. 

Another  factor  in  manufacturing  success  must  finally  be  noticed.  It 
is  that  a  manufacturer  should  be  about  his  works  early  in  the  morning. 
One  of  the  most  conspicuous  instances  of  manufacturing  success  that 
Canada  has  known,  in  which,  from  small  beginnings,  an  enormous  and 
most  profitable  business  had  been  built  up,  was  characterized  by  this  fea- 
ture. One  of  the  principals  was  always  about  the  establishment  as  early 
as  any  of  the  workmen,  going  from  floor  to  floor,  from  room  to  room, 
from  department  to  department.  Dusty  and  dirty  he  was  as  any  workman 
in  the  building,  before  breakfast.  But  a  few  hours  later  the  same  man 
might  be  seen  on  'Change,  in  the  bank  parlor,  or  in  his  own  office,  guiding 
the  finances  of  his  large  business,  or  attending  to  operations  involving  the 
welfare  of  men  in  all  parts  of  the  country.'"' 

With  regard  to  other  elements  of  success,  all  that  has  been  said  of  the 
merchant  has  an  equal  application  to  the  manufacturer. 

30  It  Is  amongst  these  large  and  diversified  spheres  of  industry,  some  mer- 
cantile, some  manufacturing,  that  banks  find  their  principal  field  of  operations: 
their  mode  of  dealing  with  each  will  be  fully  opened  up  later  on;  meanwhile  it 
may  be  observed  that  it  would  be  of  extreme  interest,  though  it  may  not  be 
possible,  for  a  special  Government  return  to  be  published,  say  once  a  year,  show- 
ing how  much  assistance  the  banks  were  rendering  to  the  various  lines  of  indus- 
try in  the  country. 


CHAPTER   XII. 

ELEMENTS  OF  SUCCESSFUL  BANKING. 

Why  a  Banker  Comes  After  a  Merchant  and  Manufacturer — Pri- 
mary Elements  of  Success — Capital — Its  Minimum — How  Dis- 
posed OF — Location  and  Style  of  Office — Officers  and  Clerks 
— The  Machinery  of  the  Office — Ultimate  End  and  Summing 
L^p   OF  What  a   Banker   Should   Be. 

IX  a  treatise  on  banking  and  commerce  it  is  perfectly  in  accordance  with 
the  reason  of  things  that  the  successful  merchant  and  successful  man- 
ufacturer should  be  treated  of  before  the  successful  banker.  There 
must  be  mercliants  and  manufacturers  before  there  can  be  a  remunerative 
business  for  the  banker ;  and  unless  there  are  successful  men  in  these  call- 
ings, a  banker,  though  he  may  take  care  of  the  surplus  money  of  the 
community,  -will  find  it  dangerous  to  lend  money  amongst  them. 

He  will  be  pressed  to  do  this  beyond  doubt,  and  every  kind  of  influ- 
ence will  be  brought  to  bear  upon  him  to  induce  him  to  comply.  He  will, 
for  example,  be  told  that  he  must  do  his  duty  as  a  citizen.  The  town 
supports  him,  and  he  ought  to  support  the  town.  It  is  a  matter  of  plain 
obligation  to  help  its  industries  along,  for  these,  it  will  be  said,  are  the 
very  foundation  of  his  own  business.  So  the  people  will  say,  and  what 
they  say  is  sufficiently  plausible  to  make  a  strong  impression.  But  many 
a  banker  has  had  to  suft'er  severely  for  listening  to  such  representations. 
In  such  circumstances,  that  is,  when  there  are  few  desirable  customers  in 
the  locality,  the  banker  will  be  ofi'ered  high  rates  of  discount.  From 
some  of  tlie  applicants  he  knows  that  he  could  take,  practically,  what- 
ever he  pleased;  and  from  the  best  of  them,  or  those  who  seem  so,  he  will 
be  offered  rates  such  as  he  might  think  would  enable  him  to  provide  a 
safety  fund.  But  on  the  supposition  that  the  business  of  the  town  is  in 
such  a  state  that  there  are  as  yet  few  or  no  successful  men  in  it,  high 
rates  of  interest  will  be  no  protection.  No  safety  fund  can  be  built  up 
that  is  large  enough  to  offset  the  losses  which  will  inevitably  ensue.  The 
successful  merchant  and  the  successful  manufacturer  therefore  must  come 
in  order  of  time  before  a  banker  can  do  a  successful  business.''^ 

31  It  may  be  said  that  such  a  state  of  things  as  has  been  Imagined  thus  far 
is  impossible.  But  experience  refutes  this  opinion.  A  case  is  known  to  the 
writer  in  which  in  the  collapse  in  a  certain  town  of  a  remarkable  "boom"  every 
single  storekeeper  in  it,  except  one,  failed.  The  town  itself  became  bankrupt  and 
could  neither  pay  interest  nor  principal  on  its  indebtedness.  Its  population  de- 
creased from  3,500  to  700,  its  main  streets  became  grass-grown,  and  handsome 
buildings  became  tenantless.  Of  the  money  lent  by  a  branch  bank  in  that  town 
more  than  thi-ee-fourths  was  lost.  If  the  banker  had  been  a  private  individual, 
he  would  have  gone  down  in  the  crash  and  been  ruined  beyond   redemption. 

This    case    was    in    Manitoba,    but    even    in    Ontario    the    writer    can    recall    In- 

75 


76  BANKING    AND    COMMERCE. 

But  now  on  the  sui^position  that  in  a  certain  locality  sufficient  savings- 
have  been  accumulated  to  give  business  to  a  banker,  and  also  that  there 
are  a  number  of  prosperous  men  of  business  in  the  locality;  -what  arc  the 
elements  that  make  a  banking  enterprise  successful  ? 

(1)  Capital  is  certainly  as  much  a  necessity'  for  a  banker  as  for  a 
merchant;  for,  speaking  of  him  in  this  personal  style,  no  man  can  ex- 
pect a  community  to  trust  him  with  the  care  of  their  money  unless  he 
has  shown  abilit}'  to  take  care  of  his  own. 

(2)  But  how  much  capital  ought  a  banker  to  have?  What  is  reason- 
able in  the  case.'' 

Putting  aside  for  the  present  the  private  banker,  it  may  be  noticed 
that  the  legislatures  both  of  Canada  and  the  United  States  have  dealt 
with  this  question  in  their  banking  laM'S.'^- 

In  Canada,  where  the  system  of  chartered  banks  issuing  circulation  is 
firmly  established,  the  Bank  Act  provides  that  no  bank  shall  possess 
a  smaller  paid-up  capital  than  $250,000.  This  sum  is  certainly  small 
enough  for  a  corporation  which  has  the  power  to  issue  notes  for  circula- 
tion— wliich  notes  are,  in  effect,  guaranteed  by  the  whole  body  of  the 
banks  of  the  country. 

In  the  United  States,  however,  every  banking  office  is  owned  by  a  sep- 
arate corjDoration  and  some  of  them,  owing  to  the  absence  of  the  branch 
system,  are  permitted  to  be  organized  on  a  capital  of  only  $25,000. 

This  must  be  conceded  to  be  running  near  the  danger  point.  It  cer- 
tainly imposes  upon  a  bank  of  such  small  dimensions  the  duty  of  incur- 
ring only  the  most  moderate  risks,  and  confining  the  business  within 
limits  more  like  those  of  a  storekeeper  than  a  banker. 

England  has  no  legal  requirement  of  minimum  capital  in  banking;  and 
the  tendency  from  the  beginning  has  been  for  banks  in  England  (as 
distinguished  from  Scotland)  to  have  a  smaller  capital  in  proportion  to 
the  business  done  than  is  common  in  Canada;  the  Bank  of  P^ngland  alone 
excepted. 

The  reason  for  this  is  twofold :  First,  the  branch  system,  until  lately, 
has  never  been  developed  in  England  to  the  extent  that  it  has  in  Scotland 
and  in  Canada.  The  banks  of  England,  as  a  rule,  do  a  much  more 
localized  business  than  tliose  of  Scotland  and  Canada.  Secondly,  but  a 
more  important  and  pertinent  reason  is,  that  business  conditions  in  Great 
Britain  are  so  much  more  settled  that  banks  may  safely  work  on  a  smaller 
relative  capital  than  is  nccesary  in  this  country. 

stances  almost  equalling  it  in  disaster.  During  a  period  of  heavy  collapse  the 
losses  suffered  by  banks  in  certain  towns  have  amounted  to  a  large  percentage 
of  their  assessed  value. 

32  There  aie  no  laws,  properly  speaking,  in  Canada,  on  the  subject  of  private 
banking,  though,  as  experience  has  shown,  some  regulations  might  have  been 
embodied  in  specific  legislation  with  advantage.  The  only  provisions  affecting 
this  class  of  bankers  are  contained  in  two  clauses  of  the  General  Banking  Act, 
viz.,  one  to  prohibit  them  from  Issuing  circulating  notes;  the  other  to  prohibit 
them  from  assuming  a  corporate  name,  such  as  that  of  the  "Iroquois  Banking 
Company."     These  provisions  are   obviou.sly   reasonable. 


ELEMENTS    OF    SUCCESSFUL    BANKING.  77 

Beyond  the  minimum  required  by  the  Banking  Act  the  members  of 
each  corporation  in  Canada  decide  for  themselves  wliat  the  capital  shall 
be.  It  depends  largely  on  the  sphere  they  intend  to  occupy,  and  how  far 
they  mean  to  extend  it. 

A  few  Canadian  banks  have  their  headquarters  in  small  towns,  and 
some  have  no  branches.     For  these  the  mininnim  of  $250,000  is  sufficient. 

At  the  other  end  of  the  scale  is  an  immense  corporation  like  the  Bank 
OF  Montreal,  with  its  head  office  in  a  large  commercial  centre,  branches 
all  over  the  Dominion,  agencies  in  the  United  States  and  England,  and 
doing  business  not  only  with  the  mercantile  community  but  with  govern- 
ments and  great  railways. 

An  institution  like  this  can  well  emi)Ioy  such  a  capital  as  $14,000,000 
or  more. 

Between  these  limits  are  banks  with  capital  ranging  from  $250,000 
to  $8,000,000. 

Tracing  now  the  business  of  a  bank  from  its  origin,  the  first  considera- 
tion will  be  in  ?vhat  form  shall  the  capital  be  held  before  business  is  actu- 
ally commenced.?  Our  Bank  Act  answers  this  question  by  requiring  that 
a  joint-stock  bank  before  commencing  business  under  its  provisions  shall 
have  the  whole  amount  of  its  capital  in  cash.  To  ensure  this  it  is  re- 
quired that  the  cash  shall  be  placed  in  the  hands  of  the  Government,  and 
that  no  business  shall  be  done  before  an  authorization  is  issued. 

A  bank  before  opening  for  business  in  Canada  will  need  to  arrange  for 
<'orrespondents  in  England  and  the  United  States.  Much  will  depend 
upon  a  proper  choice  and  satisfactory  arrangements  in  these  matters.  It 
will  also  be  prudent,  as  soon  as  possible,  to  invest  some  portion  of  the  cap- 
ital in  realizable  securities,  and  not  hold  the  whole  amount  for  discount- 
ing. Such  bonds  would  form  part  of  the  reserve  against  the  liabilities 
which  the  bank  would  begin  to  incur  to  depositors  and  noteholders,  and 
3'et  bear  a  moderate  interest.  They  are  useful  also  to  further  needful 
arrangements  with  English  correspondents.  Moreover,  the  holding  of 
such  securities  strengthens  the  position  of  the  bank,  and  its  credit  with  the 
public. 

TiiK  Arrangements  of  the  Office. 

In  the  choice  of  an  office,  two  questions  arise,  the  first  of  which  will 
be  its  localiti/j  a  matter  of  as  much  importance  to  a  bank  as  to  a  merchant. 
It  should,  if  possible,  occupj'^  a  corner,  for  the  sake  of  light.  It  should  be 
in  the  wholesale  quarter  of  the  city,  or  if  there  be  no  such  quarter,  then 
not  far  from  other  banks  if  there  are  others,  not  far  from  the  post  office; 
near  the  market,  or  the  exchange,  or  board  of  trade;  and  also,  if  pos- 
sible, near  to  the  retail  shojis. 

A  building  will  naturally  be  rented  at  the  outset,  for  it  would  be  im- 
prudent to  devote  capital  to  building  at  so  earlj^  a  stage,  and  one  should 
be   sought  that  is  substantially  built,  a   good  fire  risk,  with   other   good 


78  BANKING    AND    COMMERCE. 

buildings  about  it.  and  with  a  loft}'  main  floor  to  give  the  bank  a  respect- 
able appearance. 

As  to  the  internal  economy  of  the  office,  convenience  for  doing  business 
should  be  the  dominant  consideration,  and  not  show  or  ornament;  too 
much  of  -which  displays  bad  taste,  though  the  fittings  should  be  solid  and 
as  good  as  money  can  bu}'. 

Light  should  be  carefulh'  studied  in  the  internal  arrangements,  for 
it  is  of  the  utmost  importance  both  to  those  who  handle  money  and  those 
who  keep  books. 

A  bad  bill,  or  forged  paper,  may  be  discovered  in  a  good  light,  where 
it  would  be  passed  Avhen  light  is  dim.  A  mistake  also  in  bookkeeping 
which  would  be  readily  apparent  in  a  good  light  may  easily  be  passed  by 
when  light  is  insufficient. 

The  next  important  element  is  a  judicious  choice  of  officers,  who 
should  be  men  who  understand  their  business,  and  display  civility  and 
attention  to  customers  and  the  public.  The  subject  of  officers,  the  divi- 
sion of  their  work,  their  duties  and  qualifications  will  be  fully  discussed 
later.  It  will  be  sufficient  to  note  here  that  upon  a  proper  selection  of 
officers,  a  convenient  arrangement  of  their  work,  and  an  efficient  system 
of  check  and  supervision  no  little  of  the  success  of  a  banker  depends, 
especially  in  times  of  competition.  Without  going  into  detail  as  to  what 
constitutes  the  special  qualification  of  each,  let  it  be  noted  that  there  are 
certain  qualities  which  are  essential  to  the  success  of  any  of  them. 

A  bank  officer  should  be  of  good  character,  honorable  and  trustworthy 
in  the  instincts  of  his  nature;  in  fact,  he  should  be  what  is  generally  un- 
derstood as  a  "gentleman"  not  in  outward  manners  merely,  but  in  charac- 
ter. He  should  have  a  good  natural  aptitude  for  ariihmetic  and  have 
been  well  trained  therein.  No  matter  how  intelligent  and  well  educated 
a  young  man  may  be  in  other  respects,  a  want  of  aptitude  for  arithmetic 
will  prove  a  fatal  bar  to  progress. ^^ 

A  bank  officer  should  write  a  good  plain  hand  and  make  plain  figures. 
Many  a  mistake,  costing  the  labor  of  scores  of  hours  of  officers  to  find 
out,  has  been  occasioned  by  carelessly-formed  figures.  He  should  have 
a  good  general  education.  What  is  known  as  a  good  English  education 
may  be  said  to  be  essential.  Some  drilling  in  mathematics,  as  distinct 
from  arithmetic,  will  be  found  highly  useful  as  a  young  officer  advances 
in  his  profession.  A  university  education  is  not  necessary  in  the  case  of 
a  young  banker;  indeed,  it  is  rather  undesirable  than  otherwise,  for  to 
acquire  it  a  young  man  will  be  carried  too  far  on  in  years  before  the 
long  course  of  training  begins  to  fit  him  for  the  work  that  is  to  occupy 
his  life. 

33  A  foimcr  General  Manager  and  President  of  the  Bank  of  Montreal  was 
well  known  to  have  an  extraordinary  faculty  for  arithmetical  calculations.  To 
this  he  owed  all  his  early  advancement,  and  some  of  his  later  remarkable  success. 
He  had,  of  course,  other  prominent  qualities  which  would  have  made  him  a 
notable  man  in  any  sphere.  But  it  was  his  arithmetical  faculty  that  laid  the 
foundation  of  his  success  as  a  banker. 


ELEMENTS    OF    SUCCESSFUL    BANKING.  79 

Bank  officers,  like  other  employees,  require  to  cultivate  habits  of 
civility  and  patience.  All  sorts  of  people  are  to  be  found  at  the  counter 
of  a  bank.  Some  of  them  are  ignorant,  who  want  much  telling  what  to 
do;  some  are  impatient  and  unreasonable,  who  are  nevertheless  good  cus- 
tomers. A  bank  officer  who  is  fretful  and  impatient  will  drive  away  both 
classes  of  customers.  He  will  need  also  to  cultivate  a  habit  of  reticence. 
It  is  a  cardinal  rule  in  all  banks  that  clerks  and  officers  must  never  talk 
outside  of  what  they  see  or  hear  inside.  The  whole  business  is  confiden- 
tial. A  banker  who  is  master  of  his  business  will,  amongst  other  things, 
sufficiently  understand  human  nature  to  gather  about  him  such  men  as  are 
here  indicated.  One  by  one,  and  during  a  considerable  time,  he  will  pur- 
sue this  end,  selecting  and  training  his  officers  until  they  are  thoroughly 
efficient.  With  such  men  about  him,  a  banker  can  carry  on  his  business 
satisfactorily  so  far  as  its  internal  economy  is  concerned,  and  fulfil  the 
purpose  for  which  the  business  was  commenced. 

Thus  far  with  regard  to  a  banker's  staff  and  machinery.  A  banker, 
however,  may  carry  on  every  department  of  his  routine  business  efficient- 
ly, and  yet  fail  in  the  essential  object  of  doing  well  for  himself.  He  may 
fail  so  far  as  not  only  to  lose  part  or  the  whole  of  his  own  capital,  but  a 
part  also,  or  even  the  whole,  of  the  money  deposited  Avith  him.  These, 
unfortunately,  are  not  suppositions  and  possibilities  only;  they  have  be- 
come in  not  a  few  instances  very  exasperating  facts;  causing  distress  in 
thousands  of  households,  and  embarrassment  to  men  in  business.  Suc- 
cess, then,  to  the  banker  is  primarily  what  it  is  to  the  merchant,  viz.,  that 
he  should  continue  to  fulfil  his  functions  and  meet  his  daily  obligations  to 
the  end,  preserving  his  own  capital  intact,  to  saj^  the  least,  but  adding  to 
it  from  time  to  time  in  prosperous  seasons  until  he  accumulates  a  re- 
serve fund  to  provide  for  contingencies.  For,  as  a  merchant  desires  to 
increase  his  capital  until  it  amounts  to  a  competence,  so  a  banker,  with 
equal  propriety,  desires  to  accumulate  such  a  surplus,  after  a  reasonable 
distribution  of  profits,  as  will  amount  to  a  reserve  sufficient  to  render  im- 
pairment of  his  capital  impossible.  But  to  attain  this  he  must  be  thor- 
oughly au  fait  in  the  art  of  lending  money  and  avoiding  losses.  A  sum- 
ming up  of  what  the  banker  should  be  himself  may  be  indicated  as  fol- 
lows : 

(1)  A  successful  banker,  like  a  successful  merchant,  must  not  only 
understand  the  theory  and  practice  of  his  business  and  the  laws  with 
which  it  is  carried  on,  but  must,  as  a  rule,  have  gone  through  such  a  pre- 
paratory training  in  the  office  as  will  enable  him  to  see  that  every  part  of 
it  is  carried  on  with  economy  and  efficiency. 

(2)  He  must  possess  a  sound  judgment,  and  be  able  to  discern  be- 
tween good  loans  and  bad,  desirable  accounts  and  undesirable,  and  have 
such  a  knowledge  of  human  nature  as  will  enable  him  to  know  whom  to 
trust  and  whom  to  avoid. 

(S)  He  must  possess,  and  keep  himself  possessed,  of  a  good  stock  of 
information,  well-sifted,  and  kept  up-to-date. 


80  BANKING    AND    COMMERCE. 

(4)  To  enable  him  to  make  a  right  use  of  the  qualities,  he  must 
have  a  well-balanced  character,  viz.,  a  due  combination  of  caution  and 
enterprise,  and  neither  of  them  in  undue  measure.  Excess  of  caution 
will  prevent  him  from  taking  up  accounts  and  transactions  that  are  safe, 
for  to  the  over-cautious  man  risks  loom  up  in  unreasonable  proportions. 

On  the  other  hand,  if  a  banker  has  an  excess  of  enterprise  he  will 
take  up  accounts  that  are  undesirable,  enter  upon  lines  of  operation  that 
will  result  in  lock-ups  or  losses;  and  so  conduct  his  business  with  regard 
to  reserves  as  to  endanger  the  bank's  very  existence.  The  over-cautious 
banker  may  lose  opportunities  of  business,  but  the  interest  of  depositors 
and  stockholders  will  always  be  safe  in  his  hands.  The  over-enterprising 
banker  will  always  have  a  tendency  to  enlarge  his  business  beyond  safe 
bounds,  and  possibly  place  himself  in  the  position  of  being  compelled  in 
a  time  of  pressure  to  ask  assistance  from  his  more  prudent  neighbors. 

(5)  The  banker  should  have  firmness  and  strength  of  character,  com- 
bined with  good  will  and  courtesy. 

Of  these  the  first  are  by  far  the  more  important.  While  a  banker,  in 
his  intercourse  with  men,  is  bound,  like  other  men,  to  be  courteous,  he  has 
to  beware  of  being  what  is  generally  known  as  "a  good-natured  man." 
For  a  man  whose  predominant  trait  is  good  nature  and  benevolence  runs 
great  risk  of  becoming  the  pre}-  of  schemers  or  enthusiasts.  If  he  is  a 
banker  on  his  own  account,  he  will  almost  certainly  ruin  himself.  If 
he  is  an  officer  in  charge  of  the  general  business  of  a  corporation,  he  will 
almost  certainly  bring  it  into  embarrassment. 

On  the  front  page  of  the  New  York  Bankers'  Magazine  there  used 
to  appear  the  following  motto:  "Favor  and  benevolence  are  not  attributes 
of  sound  bankhig.  Strict  justice  and  the  fulfillment  of  contracts  are  its 
essential  elements."     This  witness  is  true. 

It  is  the  commonest  of  truisms  that  a  banker  must  be  able  to  say  no, 
and  stick  to  it;  but,  on  the  other  hand,  a  banker  who  is  alwaj-s  saying  no 
will  drive  away  good  business.  If  a  banker  gets  a  reputation  for  being 
crusty  and  sour-tempered,  people  who  have  desirable  business  to  offer 
vnW  avoid  him.  Such  a  reputation  will  not  drive  away  men  of  the  iinde- 
sirable  sort;  for,  as  a  rule,  they  care  nothing  about  the  reception  they  get, 
if  they  can  only  get  the  money.  But  men  of  standing  and  position,  who 
know  that  what  they  jDropose  is  reasonable,  will  not  put  up  with  surly 
criticisms. 

The  old  Latin  motto,  Suaviter  in  modo,  fortiter  in  re,  exactly  ex- 
presses the  combination  of  temper  needful  to  a  banker.  Courteous  in 
manner,  he  will  give  even  a  negative  answer  without  giving  offence;  firm 
in  his  position,  he  will  maintain  it  in  spite  of  all  the  importunities  of  cus- 
tomers if  what  is  asked  is  undesirable. 

(6)  A  banker  should  have  a  shrewd  judgment  as  to  subordinates. 
Men  have  various  capacities;  and  to  know  how  to  put  "the  right  man  in 
the  right  place"  is  all-im))ortant.  Especially  is  this  the  case  under  a 
banking  system  like  that  of  Canada,  where  branches  are  put  under  charge 


ELEMENTS    OF    SUCCESSFUL    BANKING.  81 

of  men  who  exercise  almost  all  the  powers  given  to  tlic  corporation.  On 
the  exercise  of  a  sound  judgment  in  this  respect,  a  large  part  of  the  suc- 
cess of  a  joint-stock  bank  with  branches  depends. 

Finally,  it  should  be  said,  that  a  banker  especially  in  the  highest  post, 
needs  to  be  a  man  of  considerable  "nerve."  There  alwaj's  have  occurred, 
at  times,  and  always  will  occur,  crises,  times  of  difficulty,  emergencies  that 
could  not  be  foreseen,  and  sometimes  startling  events  that  come  like  "a 
bolt  out  of  a  clear  sk}^"  sufficient  to  try  the  nerves  of  the  strongest  man. 

A  great  bank  suspends  payment:  confidence  in  all  banks  is  sha'ken,  de- 
positors and  noteholders  crowd  round  the  counter  all  day  long,  and  for 
days  together.  In  these  circumstances  a  banker  needs  to  keep  his  head 
cool,  and  will  not  only  avoid  yielding  to  panic  himself,  but  will  be  a  cen- 
tre of  strength  and  confidence  to  others. 

Two  instances  of  this  kind  of  courage  and  coolness  may  be  given. 

On  the  occasion  of  the  failure  of  the  Commercial  Bank  of  Canada, 
some  thirty  years  ago,  a  panic  seized  upon  the  public  of  Toronto,  and  a 
severe  run  set  in  on  the  banks  having  their  head  offices  in  Ontario.  Their 
counters  wei*e  crowded  with  an  excited  multitude  for  several  days,  and  one 
of  the  banks  had  to  be  supi)lied  Avith  gold  by  its  strong  neighbors.  There 
was  excitement  in  ^Montreal,  too,  and  on  the  third  day  a  telegram  was 
received  from  a  well-known  public  man  there  stating  it  as  the  opinion 
of  some  prominent  financiers  that  a  general  suspension  of  specie  pay- 
ments by  the  Western  banks  should  take  place.  This  advice  was  under 
consideration  by  bank  presidents  and  directors  in  Toronto,  and  some 
were  so  alarmed  that  they  recommended  its  acceptance.  But  the  Cashier 
of  one  of  the  banks,  a  young  man,  strenuously  opposed  such  a  humiliating 
course,  and  declared  that  so  far  as  his  bank  was  concerned,  his  advice 
would  be  to  stand  out  to  the  last  dollar.  This  counsel  prevailed,  and  the 
banks  were  saved  from  a  step  which  would  have  damaged  their  credit  be- 
yond recall.  Shortly  afterwards,  a  step  was  taken  by  the  Government 
which  stopped  the  i^anic. 

The  other  case  was  that  memorable  action  of  the  Governor  of  the 
Bank  of  England  on  the  occasion  of  the  crisis  which  had  overtaken  the 
great  firm  of  Baring  Brothers.  This  is  referred  to  elsewhere,  but  may  be 
briefly  noticed  here.  Had  that  house  suspended,  some  eighty  million 
dollars  of  bills  would  have  gone  to  protest,  followed  by  an  incalculable 
number  of  failures  in  all  parts  of  the  world.  The  prospect  of  a  world- 
wide financial  panic  was  sufficient  to  shake  the  strongest  nerves.  But  the 
Governor  of  the  Bank  was  equal  cO  the  occasion.  He  clearly  perceived  it 
was  a  case  for  the  co-operatirn  of  the  whole  banking  interest  of  the 
United  Kingdom,  and  called  on  every  bank  of  importance  to  join  in  tak- 
ing the  risk  of  paying  this  enormous  amount  of  bills  on  the  security  of 
the  assets  of  the  house.  The  call  was  responded  to  at  once.  The  risk 
was  divided  amongst  the  banks  without  difficulty;  whereupon  the  Bank 
of  England  made  it  known  that  arrangements  were  made  to  pay  the  bills, 
and  the  whole  financial  woild  in  every  quarter  of  the  globe  breathed  a 
sigh  of  relief.     The  courage  and  coolness  of  one  man  saved  the  situation. 


CHAPTER   XIII. 

THE  BANKER'S  INFORMATION  AND  OTHER  ELEMENTS  OF 
SUCCESS. 

Information  Necessary  to  Successful  Banking — Character  and 
Capacity  of  Borrowers — Failures  in  Business — Amount  of  Cap- 
ital— Familiarity  with  Banking  Laws — Dealing  with  Embar- 
rassed Borrowers — Knowledge  of  Security  Values — Credits — 
Mercantile  Agencies — Exchanging  Information. 

'T^HOUGH  a  banker  lias  proceeded  so  far  as  to  have  adequate  capital, 
A       due  authorization,  suitable  correspondents,  and  well-equipped  office 
and  staff,  he  will  find  himself  utterly  unable  to  proceed  in  the  way 
of  making  profit,  without  an  adequate  stock  of  information. 

If  a  young  banker  has  passed  through  the  grades  of  a  banking  office, 
and  acquired  proficiency  in  counting  money,  keeping  books  and  handling 
securities,  he  may  fancy  he  is  well  equipped  for  business,  but  this  is  only 
one-half  of  a  banker's  business,  and  by  far  the  easiest  half.  It  is  when 
persons  come  with  proposals  for  Loans,  or  for  the  Discount  of  business 
bills,  that  the  banker  finds  the  necessity  of  another  sort  of  stock  than 
money ;  and  another  sort  of  capacity  than  handling  it. 

A  person,  for  example,  comes  into  the  office,  with  a  proposal  for  a 
loan.  The  banker  has  funds,  and  he  would  be  glad  to  employ  them.  But 
he  is  at  once  confronted  with  the  question,  who  and  what  is  the  person 
proposing  to  borrow.?  Who  and  what  is  his  proposed  endorser.?  What  is 
the  real  value  of  the  security  he  offers.? 

The  primitive  banker,  sketched  in  the  beginning  of  this  treatise,  a 
wealthy  and  successful  man  of  business  and  long  established  in  the  com- 
munity, knows  everybody  in  it,  and  has  already  this  valuable  stock  of 
information  at  command.  He  can  proceed  safely  enough  in  the  business 
of  lending.  But  woe  to  the  unfortunate  banker  who  would  attempt  to 
do  a  loaning  business  without  information. 

Information,  then,  being  essential  to  successful  banking,  and  to  suc- 
cessful trading,  too  (for  banking  and  commerce  in  this  respect  are  close- 
ly connected),  it  is  proposed,  at  this  tii-ie,  to  enter  more  fully  than  here- 
tofore into  a  consideration  of  the  whole  subject. 

There  are  four  general  heads  under  which  may  be  grouped  all  the 
information  a  banker  needs  as  to  the  persons  who  propose  to  negotiate 
loans  or  discounts  with  him;  viz. — 

1st.  Antecedents. 

2d.   Character. 

3d.  Means. 

4th.   Experience. 

82 


THE    BANKER'S    INFORMATION.  83 

Each  of  clic  above  heads  of  information  lias  pccnliaritics  of  its  own, 
and  each  of  them  ramifies  into  numerous  particulars. 

For  example,  with  respect  to  character  (for  the  above  need  not  be 
taken  in  their  order),  the  most  essential  quality  is  obviously  honesty  and 
uprightness;  that  is,  that  a  man  can  be  depended  upon  to  perform  his 
promises,  to  speak  the  truth  and  attempt  nothing  unfair. 

It  is  not  generally  appreciated  as  it  should  be,  that  all  the  dealings 
of  a  banker  in  the  way  of  lending  money  are  based  on  promises;  i.  e., 
the  notes  a  merchant  offers  for  discount,  the  acceptance  of  another  mer- 
chant to  bills  of  exchange,  the  endorsements  on  which  so  many  millions  of 
loans  rest,  even  the  contracts  contained  in  debentures,  are  nothing  but 
promises  in  writing.  They  all  depend  for  their  value  on  the  character 
of  the  person  promising.  They  are  capable,  indeed,  of  enforcement  by 
law,  but  they  would  lose  all  negotiable  value  unless  they  could  be  de- 
pended upon  without  law.  It  is  one  of  tjie  marvels  of  modern  banking 
that  so  many  millions  of  assets  consist  simply  of  pieces  of  paper  on 
which  is  written,  either  I  promise  to  pati,  or  1  will  see  that  some  other 
person  fulfils  the  promise  he  has  made  to  pay.  Even  such  securities,  so 
e.illed,  as  the  bonds  of  governments,  or  other  corporations,  are  nothing  but 
promises  to  pay  certain  moneys  after  a  term  of  years,  which  promises 
may  be  kept  or  broken  a?  circumstances  develop.  Such  promises  to  the 
amount  of  millions  have  been  broken  (the  bonds  go  into  default,  as  the 
phrase  is),  and  bondholders,  on  endeavoring  to  enforce  performance  by 
law,  have  repeatedly  found  themselves  baffled  and  disappointed. 

Certainty  of  performance,  therefore,  is  the  foundation  of  all  dealing 
in  promises;  and  it  is  only  when  a  high  degree  of  reliability  is  reached 
amongst  any  circle  of  customers  that  a  banker  can  carry  on  business  with 
success.''* 

But  reliability  as  to  siairmciits  is  almost  as  important  as  reliability  as 
to  promises ;  inasnuieh  as  a  banker's  business  is  largely  founded  on  the 
representations  made  to  him  by  his  customers.  There  are  degrees  of  re- 
liability in  men.  One  will  make  misrepresentations,  deliberately,  from 
unscrupulousness,  another  from  a  sanguine  temperament,  and  then  from 
simple  carelessness.  Some  men  will  tell  a  banker  what  they  know  to  be 
false,  though  it  is  rare  for  men  to  go  so  far,  unless  in  an  extremity. 
Others  (or  the  same  man  at  other  times)  will  color  representations,  di- 
minishing some  things,  and  exaggerating  others,  making  the  favorable 
points  too  prominent  and  keeping  back  those  that  are  unfavorable;  the 
effect  being  that  a  false  impression  is  produced,  although  no  direct  false- 
hood has  been  spoken.  Beyond  all  this  lies  the  terrible  region  of  fraud 
and  forgery,  where  a  borrower  brings  promises  to  pay  for  discount,  of 
which  the  s\i)iiiosed  jiromiser  never  existed,  or,  if  he  exists,  that  he  never 
saw. 

34  It  is  generally  known  to  bankers  that  the  degree  of  reliability  as  to  per- 
formance of  promises  is  very  high  in  the  course  of  banking  business  in  England. 
A  protested  bill  is  nothing  but  a  broken  promise,  yet  some  banks  doing  a  large 
business  in  England  have  so  seldom  had  bills  protested,  that  they  looked  upon 
such  a  case,  when  it  did  happen,  to  be  ajmost  as  disgraceful  as  forgery. 


84  BANKING    AND    COMMERCE. 

Wlicn  a  man  has  gone  so  far  as  this,  lie  lias  jDut  himself  out  of  the 
pale  of  bank  dealings.     His  proper  place  is  in  the  criminal  dock. 

Varying  Degrees  of  Reliability  and  Capacity. 

But  apart  from  such  a  case  as  this — between  the  man  of  absolute  hon- 
est}'  who  can  be  relied  upon  to  perform  his  promise,  no  matter  what  it 
may  cost  him,  and  the  men  whose  word  cannot  be  relied  upon  at  all, 
there  are  many  degrees  of  reliableness.  Men  there  are  who  on  all  ordi- 
nary occasions  tell  the  truth,  but  whose  moral  courage  fails  them  in  an 
emergency.  There  are  others  who  have  a  character  for  making  misstate- 
ments to  their  neighbors,  who  never  try  to  deceive  their  banker.  The 
banker  learns  by  experience  how  to  balance  conflicting  reports.  He  will 
note  whether  statements  may  be  made  from  personal  prejudice,  trade 
rivalry,  or  political  antagonism.  Equally  will  he  guard  against  being 
misled  by  statements  of  a  favorable  nature  that  circumstances  do  not  jus- 
tify; for  this  is  the  more  dangerous  of  the  two.  The  one  would  lead  to 
loss  of  business,  whereas  the  other  would  lead  to  a  loss  of  money.  And, 
as  Mr.  Gilbart  has  well  observed  in  his  Treatise  on  Banking,  when  a 
banker  has  a  written  report  on  a  customer  before  him,  he  will  note  as 
much  what  is  omitted,  as  what  is  said.  A  man  may  be  eminently  honest 
and  truthful,  yet  it  might  be  very  undesirable  to  lend  him  money.  There 
are  honest  simpletons  and  truthful  visionaries. 

There  are  men  who  while  scrupulously  careful  as  to  performiiio-  prom- 
ises, are  ra.sli  and  sanguine  in  making  them. 

There  are  men  who  enter  upon  business  operations  who  are  fore- 
doomed to  failure  from  the  outset.  A  banker,  tliereforc,  in  the  course 
of  his  loaning  operations,  must  direct  his  attention  not  only  to  honesty  but 
to  capacity. 

This  quality,  like  honesty,  has  many  degrees  and  varieties.  It  is  a 
composite  quality,  made  up  of  various  elements  which  are  to  be  found  in 
various  combinations  in  different  individuals. 

Some  of  these  are  essential,  such  as  good  judgment,  and  common 
sense,  together  with  a  due  combination  of  caution  and  courage;  not  an 
over-developed  cautiousness,  for  in  this  case  he  would  be  afraid  to  run 
reasonable  risks,  nor  an  overweening  courage,  for  in  that  case  he  will 
venture  into  rash  operations.  Capacity  such  as  Avill  make  a  man  a  desir- 
able borrower  is  a  sum  of  desirable  qualities  well  and  reasonably  com- 
bined. For  example,  no  man  can  be  a  desirable  borrower  from  a  bank 
wlio  is  not  able  to  put  forth  strenuous  exertions  in  emergencies;  for  such 
contingencies  occur  in  every  business;  and  if  he  cannot  meet  them  he  will 
be  overthrown. 

If  a  man  is  given  to  pleasure,  and  spends  too  much  time  in  the  enjoy- 
ments of  the  table,  especially  in  drinking,  he  will  prove  to  be  a  very  un- 
desirable customer  for  the  banker.  It  need  scarcely  be  said,  except  as 
a  passing  allusion,  that  all  vicious  pleasures  must   be  shunned   by  every 


an 
sua 


THE    BANKER'S    INFORMATION.  85 

man  who  values  liis  business  cliaractcr.     Amongst  these  gambling  and  bet- 
ting must  be  included. 

A  banker,  then,  has  all  the  foregoing  points  to  consider  in  their  place 
and  order.  How,  for  example,  can  it  be  safe  to  extend  credit  to  a  man 
who  is  capable  and  economical,  if  he  is  not  honest?  Or,  honest  and 
industrious,  if  he  has  no  ability?  Or,  capable  and  economical,  if  he  has 
die  disposition?  Or,  honest  and  capable,  if  he  is  a  drinker  or  a  sen- 
list?  A  perfect  character  can  never  be  looked  for,  but  it  is  certainly- 
necessary  to  take  the  foregoing  points  into  account. 

The  antecedents  of  a  man  are  generally  more  easy  to  ascertain  than 
his  real  character,  especially  when  his  life  has  been  spent  in  the  neigh- 
borhood.    When,  however,  a  considerable  part  of  a  person's  career  has 
been  spent  in  a  distant  locality,  it  is  sometimes  difficult  to  arrive  at  the 
truth.     Enquiries  as  to  antecedents  obviously  gather  about  several  lead- 
ing points.     The  first  is,  whether  he  has  or  has  not  been  successful?     Has 
he  ever  failed?     If  he  has  failed,  then  under  what  circumstances?     Was 
it  at  a  time  of  general  depression,  when  the  strongest  firms  could  scarcely 
hold  their  own,  or  was  it  when  affairs  in  the  commercial  world  were  work- 
ing smoothly?     And  what  was  the  reason  of  his  failure?     Was  it  incom- 
petency, idleness  or  extravagance?      Did  he  over-trade  or  speculate,  or 
neglect  to  insure  r     Was  he  carrying  on  a  business  of  which  he  knew  noth- 
ing?    Was  he  foolish  in  crediting,  and  did  he  let  every  shiftless  fellow 
in  the  connininity  take  advantage  of  him  ?     Was  he  living  in  too  fine  a 
house,  making  too   great  a   show,  perhaps  building  or  buying  property 
when  he  ought  to  have  ke]it  the  money  in  the  business  ?     Prudent  bankers 
will  endeavor  to  ascertain  in  addition  whether  he  got  a  settlement,  and 
how  he  got  it.     Also  what  did  his  creditors  think  of  it,  especially  what  did 
his  banker  think?     Particularly,  was  there  any  suspicion  of  fraud  about 
his  failure,  or  any  attempt  to  take  advantage  of  the  easy  provisions  of 
a  Bankrupt  Act  and  make  money  by  declaring  himself,  or  by  collusion, 
being  declared,  insolvent? 

A  banker  might  indeed  save  himself  the  labor  involved  in  inquiries  of 
this  kind,  by  making  it  a  rule  never  to  lend  money  to  any  man  who  has 
failed  under  any  circumstances.  It  would,  perhaps,  work  to  his  disadvan- 
tage at  times,  for  a  man  who  had  learned  lessons  from  experience  may 
be  conducting  a  prudent  and  prosperous  business.  But  it  is  certain  that 
one  who  has  failed  is  apt  to  fail  a  second  time.  When  times  of  difficulty 
come,  a  person  who  has  once  failed,  is  strongly  tempted  to  give  up  the 
struggle  even  when  really  solvent. 

A  banker  may  also  reasonably  enquire  whether  the  man  has  had  fair 
success  in  business,  whether  he  "got  on"  as  the  phrase  is.  One  who  has 
barely  kept  his  head  above  water  may  sometimes  prove  an  undesirable 
borrower.  But  such  a  man  may  have  had  to  struggle  with  unusual  diffi- 
culties, and  yet  have  paid  his  way,  and  maintained  an  honorable  reputa- 
tion. Such  men,  although  they  do  not  accumulate  money,  are,  sometimes, 
the  very  "salt  of  the  earth,"  and  among  the  safest  of  a  banker's  customers. 


86  BANKING    AND    COxMMERCE. 

Amol-xt  of  Means  or  Capital. 

The  third  matter  respecting  which  information  will  naturally  be 
sought  is  as  to  a  proposed  customer's  means,  or  capital.  Some  men  who 
lend  money  would  say  that  this  is  the  only  thing  worth  enquiring  about. 
Without  going  so  far  as  this,  common  prudence  suggests  that  a  man's 
capital  is  a  matter  of  the  first  importance.  Yet  it  is  extremely  difficult  to 
get  accurate  information  about  it.  Men  almost  invariably  consider  them- 
selves worth  more  than  they  really  are,  hence  it  is  necessary  to  criticise 
all  statements  of  assets  with  a  view  to  correcting  over-valuations.  But 
there  are  men  in  business  and  desiring  to  be  customers  of  banks,  too,  M'ho 
never  make  out  a  balance-sheet  at  all,  contenting  themselves  with  mere 
lists  of  accounts  due  to  them,  and  now  and  then  estimating  the  value  of 
their  stock  b}-  guesswork. 

If  they  own  real  property,  they  generally  consider  it  worth  its  cost. 
Of  liabilities  they  rarely  keep  an  accurate  account,  except  possibly  of 
notes  they  have  signed.  Thus,  judging  both  their  assets  and  liabilities 
by  guesswork,  they  estimate  their  means  by  guesswork  too ;  guessing  them- 
selves to  be  worth  one  or  more  thousands  of  dollars,  they  claim  credit 
accordingly. 

But  a  banker  would  be  simple,  indeed,  who  would  be  satisfied  with 
this.  He  Mill  ask  for  what  is  generally  called  a  "statement,"  which 
statement,  for  obvious  reasons,  should  be  in  writing.  Yet  a  prudent 
banker  will  rarely  act  upon  a  written  statement  without  a  conversation 
with  the  party  who  has  submitted  it.  Such  conversation  will  often  bring 
out  points  that  a  bare  statement  leaves  unrevealed,  and  will  prove,  if 
carried  out  judiciously,  of  great  value  to  the  party  concerned,  as  enabling 
him  to  understand  his  real  position.  Moreover,  in  many  cases,  this  will 
afford  a  fair  index  to  the  borrower's  habit  of  mind,  and  show  how  far  he 
is  to  be  trusted  in  any  future  representations  he  may  make.^^ 

With  regard  to  the  Experience  a  proposed  borrower  has  had  in  the 
business  he  is  carrying  on,  it  is  a  comparatively  simple  matter  to  ascertain 
it.  If  he  has  always  carried  on  business  in  the  same  town  or  neighbor- 
hood his  experience  will  be  a  matter  of  notoriety. 

If  it  has  been  gained  in  some  distant  place  the  information  received 
as  to  antecedents  will  cover  the  point. 

But  now  supposing  that  the  banker  has  acquired  a  sufficient  stock  of 
information  to  justify  him  in  commencing  to  deal  with  borrowers,  he 
must  not  imagine  that  he  is  exempt  from  the  trouble  of  making  future 
enquiries.  Changes  are  constantly  taking  place,  and  it  is  necessary  for  a 
banker  to  keep  his  information  abreast  of  the  times.  Last  year's  reports 
are  not  a  safe  foundation  for  this  year's  business. 

Premonitory  symjitoms  of  coming  trouble  are  of  tlie  first  importance 

35  There  Is,  however,  a  mode  of  giving  information  wliicli  may  be  more  valu- 
able even  than  a  written  statement.  When  a  merchant  livos  in  a  distant  town 
and  his  banl<cr  casually  calls  upon  him,  the  merchant  may  then  take  him  Into 
his  office  and  open  the  private  ledger  containing  his  last  stock-taking  and  state- 
ment of  profit  and  loss.  It  is  impossible  fur  this  to  have  been  made  up  for  the 
occasion,  and  the  very  act  of  doing  so  will  tend  to  inspire  confidence. 


THE    BANKER'S    INFORMATION.  87 

for  a  banker  to  consider.  Especially  such  as  come  under  his  own  obser- 
vation. He  will,  however,  take  care  that  his  observations  are  accurate 
and  his  information  to  be  relied  on.  He  will  constantly  be  coming  into 
contact  with  the  better  informed  class  of  the  community  and  have  the 
oi^portunity  of  separating  the  chafl"  from  the  wheat.  He  will  always  be 
on  the  look-out  for  information,  even  when  transacting  ordinary  business, 
but  he  will  beware  of  encouraging  his  customers  to  gossip  to  him. 
This  is  particularly  the  case  needful  in  country  towns  where  a  banker  has 
farmers  for  customers. 

In  seeking  information  a  banker  will  be  careful  not  to  waste  his 
customer's  time  bv  asking  too  many  questions.  If  he  gets  a  reputation 
for  what  is  called  "pumping,"  he  will  be  avoided.  The  time  of  mercan- 
tile customers  is  probably  as  valuable  as  his  own,  and  while  the  informa- 
tion he  may  receive  will  have  a  direct  monetary  value  to  him,  it  is  no 
benefit  to  him  who  imparts  it. 

In  large  cities  there  are  generally  to  be  found  persons  who  have  a 
sort  of  faculty  for  acquiring  information.  They  pick  it  up  on  'Change, 
or  at  the  Club,  or  at  Board  of  Trade  meetings,  or  in  traveling.  They 
have  often  a  kind  of  instinct  for  discerning  the  quality  of  information 
and  know  what  is  worth  talking  about  and  what  is  not.  Acquaintance  with 
a  man  of  this  class  is  invaluable  to  a  banker. 

The  knowledge  to  be  acquired  through  Mercantile  Agencies  is  dealt 
with  further  on. 

There  are,  however,  other  things  that  claim  the  attention  of  a  banker 
besides  information  as  to  the  people  with  whom  he  is  likely  to  do  business. 
The  first  of  these  is  a  knowledge  of  the  laws  under  which  he  does  busi- 
ness. Later  on  in  this  work  there  is  given  a  synopsis  of  the  law  relating 
to  joint-stock  banking  in  Canada  and  the  United  States.  As  by  far  the 
larger  part  of  the  banking  of  the  country  is  carried  on  under  this  law 
it  will  be  assumed  that  a  Canadian  banker  has  become  familiar  with  its 
provisions,  especially  with  those  relating  to  his  function  as  a  money- 
lender and  the  securities  he  can  take  therefor.  He  will  learn  from  thence 
what  he  has  power  to  do,  and  what  he  is  prohibited  from  doing,  what  are 
his  powers  and  limitations  regarding  real  estate  and  fixed  property,  also 
as  to  security  in  the  shape  of  warehouse  receipts,  bills  of  lading,  liens, 
hypothecations,  and  other  matters.  Along  with  this  he  will  learn  what 
the  law  allows  in  dealing  with  dej^ositors  of  various  classes ;  also  what  are 
his  obligations  toward  the  Government  itself.  The  provisions  of  the  Bank 
Act  should  be  so  familiar  ihat  it  will  become  practically  impossible  for 
him  to  incur  any  of  the  penalties  provided  for  violating  them. 

Besides  this  special  knowledge  of  the  banking  law,  a  banker  will  need 
a  general  acquaintance  with  tlie  law  of  bills  of  exchange,  and  promissory 
notes;  what  constitutes  their  validity,  and  negotiability,  also  recourse  upon 
endorsers,  policies  of  insurance,  guarantees,  mortgages  on  real  estate, 
chattel  mortgages,  how  to  proceed  to  enforcement,  and  other  matters  re- 
lating to  securities.  A  banker  need  not  be  a  lawyer  to  have  such  knowl- 
edge of  these  things  as  is  necessary  to  conduct  his  daily  business,  and 


88  BANKING    AND    COMMERCE. 

give  instructions  to  his  clerks.  There  will,  however,  arise  at  times  ques- 
tions regarding  jjarticular  points  of  procedure  respecting  which  he  would 
do  well  to  consult  his  lawyer.  But,  as  he  proceeds,  a  banker  will  grad- 
ually become  as  familiar  with  what  he  has  power  to  do  and  what  he  has 
not  as  a  merchant  is  with  the  tariff. 

With  regard  to  cash  reserves  and  investments  a  banker  should  not 
only  understand  wliat  is  the  proper  proportion  to  be  observed,  but  be 
possessed  of  sufficient  skill  and  firmness  to  guide  his  discounting  opera- 
tions so  as  to  maintain  them. 

An  important  qualification  of  a  successful  banker  is  the  faculty  of 
dealing  with  customers  who  fall  into  embarrassment,  and  of  realizing 
securities  to  the  best  advantage,  In  spite  of  all  a  banker's  caution  he  will 
find  himself  compelled  at  times  to  deal  with  embarrassed  customers  (em- 
barrassed through  no  fault  of  his),  and  compelled  also,  much  as  he  may 
dislike  it,  to  devote  time  and  skill  to  the  working  out  of  Insolvent  Estates. 
Times  of  difficulty  recur  periodically  in  the  commercial  M'orld,  when  in- 
solvencies rise  far  beyond  the  usual  average.  It  is  in  these  difficult  times 
that  a  banker's  judgment  and  skill  are  severely  tried;  not  only  in  making 
the  best  of  securities,  but  in  considering  that  most  difficult  question.  Shall 
he  support  his  customer,  and  nurse  him  into  a  safe  position,  or  shall  he 
refuse  further  advances  and  let  matters  take  their  course?  Which  of 
these  lines  to  take  is  generally  a  perplexing  question  to  answer.  Either 
of  them  may  lead  to  loss,  if  a  mistake  is  made.  The  customer's  business 
may  be  too  deeply  embarrassed  to  permit  of  its  recovery;  in  that  case 
additional  advances  will  only  lead  to  additional  loss.  On  the  other  hand, 
if  it  is  not  too  far  gone,  a  little  timely  help  may  tide  a  Avorthy  and  capable 
man  over  temporar}^  difficulty  and  preser\e  him  as  a  good  customer  to  a 
future  time. 

To  refuse  help  altogether,  would  lead  to  certain  loss.  There  is  thus 
the  alternative  of  certain  loss  on  the  one  hand,  of  possible  avoidance  of 
loss  on  the  other,  with  the  other  alternative  that  the  help  may  prove  in- 
sufficient, and  the  loss  be  increased.  The  only  safe  course  to  follow  in 
such  cases  is  this:  if  the  party  is  honest  and  has  the  capacity  to  succeed 
if  help  is  rendered — then  care  should  be  taken  to  ascertain,  by  the  bank- 
er's own  examination,  whether  the  party  is  really  solvent;  and,  next,  to 
require  such  additional  security  as  the  law  will  allow,  and  as  will  not 
prejudice  the  customer's  position.  If  the  debtor  is  thus  kept  on  his  feet, 
it  is  not  unreasonable  to  require  that  the  banker  should  have  some  super- 
vision over  the  business  until  such  time  as  ciKoumstances  prove  to  be  un- 
necessary. If  such  a  step  is  taken,  the  banker  will,  of  course,  carry  it 
out  prudently,  and  not  give  the  customer  reason  to  complain  of  inquisi- 
torial prying,  or  of  unreasonable  interference  with  his  business. 

It  is,  at  all  events,  certain  tliat  this  course  has  been  more  than  once 
tried,  and  with  tlie  best  results. 

A  banker  will  not  have  proceeded  far  in  the  way  of  his  discounting 
before  he  perceives  the  importance  not  only  of  information  respecting 
his   immediate  customers  but  of  the  persons  with   whom   they  deal.      He 


THE    BANKER'S    INFORMATION.  89 

will  find  it  necessary  also  if  he  is  doing  business  in  a  city  to  become  ac- 
quainted with  the  various  classes  of  secitrUies  that  are  offered  for  Loans, 
or  which  it  may  be  desirable  to  purchase  for  investment.  It  will  be  well 
also  that  he  should  become  acquainted,  in  some  degree,  with  the  staple 
products,  which,  under  our  banking  law  can  be  transferred  to  him  as 
security,  and  Avith  the  prices  current  from  time  to  time,  and  the  condition 
of  the  trade  in  general. 

A  banker  should  be  sufiiciintly  wtll  informed  to  be  able  to  advise  an 
importer,  let  us  say,  to  moderate  his  purchases,  giving  reasons  therefore 
or  an  exporter  whether  to  warehouse  and  hold  for  a  time,  or  to  engage  all 
freight  possible  and  bring  his  goods  to  market.  This  by  no  means  implies 
that  he  shall  acquire  such  technical  knowledge  as  would  enable  him  to 
either  buy  or  sell  the  commodities.  No  banker  could  pretend  with  any 
reason  to  discuss  the  quality  of  a  piece  of  cotton  goods  with  a  merchant, 
or  to  criticise  the  workings  of  the  gangs  in  a  sawmill  with  the  owner. 
But  he  should  know  enough,  let  us  say,  of  the  trade  of  a  wholesale  mer- 
chant to  judge  whether  he  was  carrying  a  reasonable  or  unreasonable 
amount  of  stock,  as  bearing  on  the  amount  of  the  credit  such  a  merchant 
might  apply  for.  Similarh',  with  regard  to  a  flour  mill,  a  banker  should 
be  well  enough  informed  about  the  business  to  judge  whether  a  jiroposed 
credit  would  be  reasonable.  He  should  also  have  such  a  general  knowledge 
of  the  timber  business  in  its  financial  aspects  as  would  enable  him  to 
judge  whether  the  scale  of  his  customer's  operations  was  in  proportion 
to  his  capital,  and  whether  his  credit  was  being  used  economically.  He 
should  know  how  much  lumber  a  given  expenditure  ought  to  produce,  and 
be  able  to  judge  whether  the  business  was  well  managed  or  otherwise  by 
the  working  of  his  customer's  bank  account. 

And  so  with  every  leading  line  of  business  in  which  his  customers  are 
engaged.  It  tends  to  establish  good  relations  between  the  banker  and  the 
merchant,  w-hen  a  man  of  business  finds  his  banker  well  enough  informed 
to  be  able  to  discuss  the  financial  aspects  of  his  business.  From  such  a 
banker  a  merchant  will  more  readily  take,  not  only  pertinent  hints  and 
ordinary  advice,  but  those  checks  and  refusals  which  at  times  are  neces- 
sary to  sound  banking. 

It  is  not  only,  however,  with  regard  to  general  lines  of  credit  to  the 
customer  himself,  that  the  banker's  information  is  important,  but  also 
with  regard  to  the  credit  that  his  customer  gives  to  those  who  buy  from 
him.  A  banker  should  be  sufficiently  informed  to  be  able  to  say  to  a 
wholesale  merchant  who  oft>rs  bills  for  discount,  "You  give  a  large  line 
of  credit  to  such  a  one.  Probably  you  suppose  you  have  his  whole  ac- 
count. But  I  may  tell  you  in  confidence  that  you  have  not.  He  buys  the 
same  kind  of  goods  to  my  knowledge,  from  another  house,  and  my  judg- 
ment is  that  both  of  you  are  giving  him  more  credit  than  is  desirable." 

A  merchant  would  be  foolish  indeed  who  did  not  take  such  a  hint  in 
good  part  and  profit  by  it. 

The  conversation  may  take  the  shape  of  a  criticism  of  the  standing  of 
a  wholesale  house.     This  house  buvs  ijoods  from  a  manufacturer,  who  is 


90  BANKING    AND    COMMERCE. 

wise  enough  to  consult  his  banker  about  credits.  It  would  suit  the  manu- 
facturer to  sell  the  merchant  a  larger  line  of  goods,  but  he  does  not  know 
enough  about  him  to  take  the  risk.  Here  the  banker  may  feel  justified 
in  giving  his  manufacturing  customer  tlie  benefit  of  confidential  informa- 
tion. In  doing  this  he  will  consider  well  the  kind  of  man  to  whom  he  is 
speaking,  and  M'hat  use  he  is  likely  to  make  of  the  opinion  expressed. 

Exporters  are  increasingly  in  the  habit  of  attaching  bills  of  lading 
to  the  bills  they  draw.  These  are  commonly  directed  to  be  held  until  the 
bill  of  exchange  is  paid.  But  there  are  exceptions.  It  is  in  regard  to 
these  that  a  banker's  information  might  be  all  important.  Some  mer- 
chants in  Great  Britain  will  not  accept  bills  at  all  unless  the  bills  of  lad- 
ing are  given  up;  or  they  may  require  that  bills  shall  be  surrendered  to  a 
certain  amount,  and  in  some  lines  of  export  business  it  is  not  customary 
to  attach  bills  of  lading  at  all.  In  such  cases  the  exporter  has  to  rely 
altogether  on  the  standing  of  the  foreign  house;  and  a  well-informed 
banker  can  render  his  customer  invaluable  service.  The  banker  may  pos- 
sibly express  his  opinion  rather  in  acts  than  in  words.  He  will  not  take 
the  bill  except  with  documents  attached ;  or,  if  the  documents  are  attached, 
he  will  not  consent  to  their  being  surrendered  before  payment. 

A  Canadian  banker  will  therefore  take  means  to  keep  his  information 
well  up  as  to  changes  in  foreign  firms. 

In  the  commercial  centres  of  Great  Britain  the  facilities  for  specula- 
tion are  so  multiplied  as  to  constitute  a  positive  temptation.  A  shipowner 
in  Liverpool  may  be  drawn  into  dabbling  in  cotton;  a  Glasgow  grain 
merchant  may  try  his  luck  with  iron.  As  to  London  the  opportunities 
for  speculation  are  infinite,  and  embrace  everything  going  on  in  the 
business  world. 

It  is  therefore  of  high  importance  to  an  exporter  and  a  banker  who 
deals  with  exporters  to  keep  his  information  up  to  date.^" 

Mercantile  Agencies. 

Mercantile  agencies  have  been  so  remarkably  developed  during  the 
last  thirty  years  that  they  are  indispensable  to  all  who  give  credit,  either 
in  the  shape  of  goods  or  money.  The  information  they  place  at  the  ser- 
vice of  their  clients  goes  much  beyond  mere  books  of  reference,  and  em- 
braces detailed  reports  covering  all  four  of  the  points  referred  to  in  an 
earlier  part  of  this  treatise. 

Such  reports,  too,  are  often  accompanied  by  balance-sheets,  so  that  a 
banker  has  furnished  to  him  what  are  practically  a  number  of  business 
histories  condensed  into  a  small  compass  and  so  methodically  arranged  as 
to  be  accessible  with  the  smallest  trouble. '^^ 

36  See  the   chapter  on  commercial  bills  drawn   In  sterling  money. 

37  The  records  hitherto  published  by  one  credit  agency  in  Great  Britain  are  of 
exceptional  value,  being  arranged  on  scientific  principles,  and  enabling  every 
leading  circumstance  affecting  credit  to  be  taken  In  at  a  glance.  It  is  well  known 
in  banking  circles  that  the  conductors  of  this  agency  have  been  men  of  remarkable 
Information  and  sound  judgment. 


THE    BANKER'S    INFORMATION.  91 

A  banker,  however,  will  find  it  jirudent  to  bring  a  critical  judgment  to 
bear  on  such  reports,  for  a  mercantile  agency  makes  mistakes,  as  well  as 
its  clients.  It  can  only  report  what  is  reported  to  it;  and  its  reporters, 
though  generally  well-informed  men,  do  not,  and  cannot,  know  everything 
that  is  occurring. 

In  examining  these  reports  it  is  always  im])ortant  to  note  the  differ- 
■ence  between  facts  stated  and  opinions  expressed. 

With  regard  to  the  balance-slieets  in  such  rei)orts,  it  should  be  re- 
membered that  they  arc  communicated  by  the  party  himself.  A  banker, 
of  course,  will  compare  sucli  balance-sheets  with  any  that  have  been  ren- 
dered to  him. 

But  these  reports  are  not  the  only  reports  that  mercantile  agencies 
publish.  An  important  part  of  their  business  is  to  collect  information  of 
the  changes  that  occur,  especially  those  of  an  unfavorable  character.  Thus 
they  furnish  their  suj^porters  with  lists  of  suits  that  are  taken,  and  what 
is  more  important,  of  chattel  mortgages,  bills  of  sale,  judgments,  execu- 
tions, and  insolvencies.  Partnerships  also  come  within  their  purview; 
those  formed  or  dissolved,  together  with  information  as  to  death  of  part- 
ners, which,  of  course,  ends  the  partnership.  The  lists  containing  such 
information  are  long  and  the  ta.sk  of  examining  them  laborious.  But  no 
"banker  who  does  an  active  business  with  the  mercantile  community  can 
afford  to  pass  them  by,  or  to  look  over  them  in  a  perfunctory  manner. 
An  omission  to  notice  some  single  unfavorable  particular  may  cost  a 
banker  or  his  customers  thousands  of  dollars,  especially  if  it  relate  to  a 
foreign   firm. 

Bankers  at  times  ask  information  of  one  another.  Formerly  there 
-was  scarcely  anv  other  source  of  information  available,  and  much 
correspondence  was  carried  on  between  them  on  the  subject.  But 
time  has  brought  new  developments.  Bankers  do  not  now  corres]iond  as 
much  as  they  once  did  respecting  their  customers,  though  they  do 
occasionally  compare  notes  in  confidence.  There  are  considerations  as  to 
such  information  that  do  not  apply  to  any  other  mode  of  obtaining  it. 
For  example,  let  us  suppose  that  a  banker  desires  of  a  confrere  informa- 
tion as  to  one  of  his  customers.  If  the  customer  is  in  a  good  position  and 
doing  well,  there  is  little  difficulty  in  answering.  But  if  the  contrary  is 
the  case,  what  then.?  The  account  of  such  a  customer  may  be  one  that 
the  other  banker  is  carefully  "nursing,"  getting  increased  security  when- 
ever he  can;  hoping  all  may  be  well,  yet  being  by  no  means  sure. 

Is  he  to  damage  his  customer's  credit  by  telling  a  confrere  this?  If 
-he  does,  he  may  bring  about  a  stoppage  and  ruin  his  customer.  On  the 
other  hand,  if  he  conceals  the  real  position  and  gives  a  favorable  opinion, 
he  will  violate  the  conlldence  which  ought  always  to  exist  between  bankers. 
The  result  usually  is  this:  As  bankers  never  care  to  give  an  un- 
favorable opinion,  while  a  favorable  one  may  be  unjust,  and  as  the  de- 
clining to  express  an  opinion  would  be  construed  unfavorably,  they  seldom 


92  BANKING    AND    COMMERCE. 

or  never  ask  one  anotlier  at  all,  that  is^  as  to  their  own  respective  custom- 
ers. 

A  banker  in  Canada  who  buys  a  large  amount  of  bills  upon  houses  in 
centres  of  British  trade,  will  find  it  advantageous  to  visit  such  centres  oc- 
casionally, and  compare  notes  on  the  spot,  with  his  banking  correspond- 
ents. In  so  doing  he  will  learn  many  things  which  would  never  be  com- 
municated to  him  in  writing,  and  which  no  mercantile  rating  Avould  give 
him  any  idea  of.  There  is  this  reason  for  taking  such  a  course,  that 
English  bankers  never  commit  themselves  in  writing  except  to  very 
guarded  statements.  They  are  in  the  habit  of  stating  that  such  and  such 
a  firm  is  "considered  to  be  worth,"  say,  a  hundred  pounds,  or  it  is  "good 
for  engagements." 

Such  reports  generally  fail  to  meet  the  need  of  the  enquirer.  To  say 
that  a  firm  in  Britain  is  good  for  a  few  hundred  pounds,  when  the  banker 
on  this  side  knows  that  they  are  making  purchases  amounting  to  many 
thousands,  is  obviously  insufficient.  And  to  say  that  such  a  one  is  "con- 
sidered" to  be  "good  for  his  engagements,"  if  the  statement  is  taken 
literally,  is  simply  to  suggest  that  he  has  no  capital  at  all. 

If  specific  information  is  wanted,  the  better  course  is  to  ask  specinc- 
ally,  giving  exactly  the  point  to  be  covered.  When  the  question  is  put  in 
a  vague  and  general  form,  "What  is  tlie  standing  of  such  a  one?"  it  will 
bring,  as  a  rule,  only  a  vague  and  general  answer. 

But  if  the  querist  puts  such  a  question  as  this:  "Would  it  be  safe  for 
our  customer  here  to  ship  such  a  firm  two  thousand  pounds'  worth  of 
merchandise  without  security?"  he  is  likely  to  get  a  much  more  specific 
answer,  guarded  though  it  may  be. 

The  last  remaining  source  of  information  arises  in  the  daily  inter- 
course of  a  banker  with  his  customers  and  the  public.  This  has  been  re- 
ferred to  already,  but  it  may  be  desirable  to  observe  that  a  banker,  even 
while  transacting  routine  business  with  customers,  or  mingliiig  with  his 
fellow-s  in  the  club  or  elsewhere,  will  note  anything  affecting  his  interests; 
and  by  practice  will  acquire  the  art  of  doing  this  even  when  least  appear- 
ing to  do  it.  A  casual  remark  dropped  in  conversation  across  the  table, 
or  a  query  addressed  to  him  in  a  chance  meeting  with  an  acquaintance, 
may  give  to  a  quick  intellect  a  clue  which,  if  followed  up,  will  lead  to 
most  important  consequences. 

Almost  evei-y  particular  in  this  and  the  preceding  chapter  has  an  ap- 
plication to  Commerce  as  to  Banking.  The  wholesale  merchant  with  his 
large  circle  of  customers  is  under  the  same  pressure  to  keep  up  informa- 
tion as  is  the  banker.  Both  mainly  rely  on  the  same  sources  of  informa- 
tion and  their  interests,  as  regards  information,  are  identical.  Th.cy 
cover  the  same  ground,  and  are  subject  to  the  same  conditions.  Both 
are  dispensers  of  credit,  the  one  in  money,  the  other  in  goods,  and  the 
same  general  laws  of  credit  are  applicable  to  both  bankers  and  merchants. 


CHAPTER   XI r. 

LOANS. 

Difference  Between  Loans  and  Discounts — Loans  to  Various 
Classes — To  Farmers — To  Grain  Merchants — Warehouse  Re- 
ceipts of  Various  Kinds  and  the  Law  Relating  Thereto. 

WHEN  a  banker  has  acquired  sufficient  information  as  to  persons 
and  securities  to  enable  him  to  part  witli  money  with  reasonable 
assurance  of  its  return  when  promised,  he  may  enter  upon  that 
difficult  field  of  operations  which  will  prove  either  the  making  or  the 
marring  of  him,  viz.,  tlie  conducting  of  Loans  and  Discounts.  It  is  obvi- 
oush'  in  this  department  of  a  banker's  business  that  the  connection  be- 
tween Banking  and  Commerce  is  most  clearlj^  shown,  and  most  constantly 
in  operation.  The  public  at  large  has  to  do  with  banking  corporations 
OS  issuers  of  circulating  notes  and  receivers  of  deposits,  but  in  making 
loans  and  discounting  bills,  banks  have  to  do  with  the  commercial  classes 
almost  exclusively.  It  is  well,  however,  at  this  stage,  for  the  sake  of 
clearness  to  reiterate  that  the  word  "commerce"  is  used  throughout  this 
work  in  a  broad  and  comjjrehensive  sense.  Besides  the  merchant,  prop- 
erly so  called,  the  whole  class  of  manufacturers  is  included,  inasmuch  as 
they  require  to  sell  what  they  produce  and  to  buy  their  raw  material.  For 
the  same  reason,  the  whole  farming  class  is  included;  for  the  farmer 
appears  on  the  market  both  as  a  seller  and  a  huycr.  He  sells  his  products, 
and  he  buys  his  machinery  and  materials. 

Banking  is  distinguished  from  money  lending  in  that  it  requires  an 
active  " ttirn-over ;"  hence  loans  for  periods  of  years  are  entirely  foreign 
to  its  scope,  as,  also,  are  loans  of  money  which,  even  if  made  to  a  business 
firm,  cannot  be  repaid  periodically  out  of  its  active  operations.  To  loan 
a  manufacturer  money  to  build  or  equij)  a  mill  is  a  violation  of  prudent 
banking,  even  though  the  security  may  be  good.  The  whole  operation  of 
loaning  money  on  security  of  land,  buildings,  ships,  or  mines,  belongs  to 
another  category  of  business  than  banking.  This  has  been  so  recognized 
by  the  Legislature  of  Canada  in  granting  charters  to  banking  ci^rpora- 
tions,  that  they  are  absolutely  prohibited  from  lending  money  on  immov- 
able property. 

This,  therefore,  being  understood  at  the  outset,  let  us  enquire  w^hat 
line  of  loans  are  called  for  by  the  operations  of  Commerce.^  On  what 
ground,  and  with  what  documents  of  security,  can  a  merchant  or  manu- 
facturer properly  approach  a  banker  when  he  desires  the  use  of  the 
bank's  money? 

93 


9i  BANKING    AND    COMMERCE. 

Distinction  Between  I-oaxs  and  Discounts. 

This  question  opens  up  a  variet}'  of  considerations,  the  first  of  which 
is  the  distinction  between  loans  and  discounts. 

Though  both  classes  naturally  arise  in  the  dealings  of  bankers  witli 
corcmercial  customers  and  both  are  exactly  alike  in  that  they  draw  money 
from  a  bank,  there  are  fundamental  differences  between  them  in  their 
origin,  nature,  and  practical  working.  The  main  difference  is  this. 
When  a  Merchant  or  Manufacturer  has  made  a  sale  of  goods  and  received 
in  return  a  written  promise  to  pay  for  them  at  a  definite  time,  he  is  in 
possession  of  a  valuable  document,  which  he  maj^  offer  to  a  banker  for 
discount;  that  is,  he  will  ask  the  banker  to  give  him  the  amount  promised 
in  the  document,  deducting  the  interest  thereon.  T)iis  deduction  of  in- 
terest beforehand  is  what  the  word  "discount"  means.  The  merchant,  of 
course,  signs  his  name  to  the  document,  and  this  signature,  in  law,  op- 
erates as  a  guarantee  of  ])ayment,  should  the  other  partj'  not  fulfil  his. 
promise.  ^^ 

The  banker,  therefore,  having  a  document  founded  on  a  sale  of  mer- 
chandise (for  value  received,  as  the  technical  expression  is),  has  a  prima 
facie  assurance  that  merchandise  of  sufficient  value  to  ensure  payment  has 
passed  from  the  seller  to  the  buyer.  This  transaction  between  the  banker 
and  his  customer  has  a  close  analogy  to  the  purchase  and  sale  of  a  com- 
modity ;  the  bill  being  the  commodity,  and  the  net  proceeds  of  the  discount 
the  price  paid  for  it.  And  it  has  been  contended  by  an  able  writer  on 
banking  that  this  is  the  proper  mode  of  viewing  it ;  that  is,  as  a  sale  nilh 
guarantee;  and  that  the  proper  title  of  all  such  transactions  in  a  banker's^ 
books  and  elsewhere  is  not  "Bills  Discounted,"  but  "Bills  Purchased."" 
This  practice  has  been  adopted  by  some  bankers,  and  it  has  the  advantage 
of  making  a  clear  distinction  between  two  classes  of  transactions,  the 
confounding  of  Avhich  on  this  continent  has  worked  very  serious  mischief. 

A  banking  loan  is  a  different  matter  in  several  respects.  To  begin 
with,  it  is,  as  a  rule,  applied  for  at  an  earlier  period.  The  customer  has 
no  promise  from  a  buyer  to  offer;  in  fact,  in  many  cases,  he  has  not  any 
salable  goods  in  possession  when  he  negotiates  the  loan.  What  he  desires 
is  to  borrow  the  money  in  order  to  produce  the  goods ;  or,  in  some  cases  to 
bring  the  goods  to  his  warehouse.  The  transaction,  to  go  to  the  root  of  it, 
is  borrowing  money,  instead  of  selling  a  document.  It  is  important  to 
keep  the  distinction  clear;  but  this  is  more  diiHeult  on  this  side  of  the 
Atlantic  than  in  Great  Britain,  owing  to  the  prevailing  ]n-actiee  of  having 
borrowings  represented  by  promissory  notes,  made  in  thi'  same  form  as 
those  given  for  a  purchase  of  goods. -^^ 

38  This  is  the  usu^l  course  of  business.  But  there  are  cases,  especially  in 
large  financial  centres,  where  a  banker  or  bill-broker  agrees  to  relieve  the  mer- 
chant from  being  so  called  upon.  In  that  case,  the  merchant  when  endorsing  the 
bill,  adds  the  words  "without  recourse,"  meaning  (and  this  is  the  legal  effect  of 
the  term),  that  he  is  not  to  be  called  on  for  payment  in  case  the  bill  is  dishonored. 
The  banker,  of  course,  charges  a  higher  rate  for  such  a  transaction. 

3(1  The  notes  which  represent  borrowings  are  often  treated  by  Canadian  banks 


LOANS.  95 

When  a  loan  or  standing  credit  is  proposed  to  a  banker,  there  arise 
four  piactical  considerations:  For  liow  much?  For  how  long?  For 
what  purpose  wanted?  On  what  security?  The  two  first  can  be  an- 
swered in  a  few  words,  but  with  regard  to  the  two  last,  long  explanations 
may  be  needed;  and  much  consideration  and  consultation  before  an 
answer  can  be  given.  Here  the  difference  between  a  loan  and  a  discounted 
bill  becomes  very  apparent;  for  when  a  trade  bill  is  offered,  three  of  the 
foregoing  questions  are  answered  by  the  bill  itself.  For  it  tells  for  how 
long,  for  how  much,  and  on  what  security;  and  that  without  a  word  spoken 
by  the  customer  who  offered  it.  But  when  he  desires  a  loan,  a  customer 
must  explain  himself  on  every  one  of  these  points,  and  be  prepared  to 
answer  questions  as  to  the  two  last. 

There  are  as  many  varieties  of  loans  as  there  are  of  occupations  in  the 
district  where  transactions  arise,  and  each  variety  has  its  own  special  con- 
ditions.    All  these  may  be  summed  up  in  the  following  classifications: 

1.  Loans  connected  with  Agricultural  pursuits,  and  with  the  dealing 
in  their  products. 

2.  Loans  connected  with  the  products  of  Woods  and  Forests. 

3.  Loans  connected  with  jNLinufacturing  industries,  as  well  as  min- 
ing, fishing,  etc. 

4.  Loans  arising  out  of  the  Importing  trade;  and  the  dealing  in 
manufactured  articles. 

All  these  are  distinctly  Commercial. 

But  there  are  also  loans  to  various  classes  of  corporations,  such  as 
railways,  power  companies,  municipalities  and  Governments;  or,  to  capi- 
talists other  than  merchants,  or  to  private  individuals.  Before  proceeding 
to  consider  in  detail  the  loans  indicated,  one  general  remark  may  be  made 
with  regard  to  all,  viz.,  that  everi/  legiiimate  loan  from  a  hanker  will  rest 
on  a  foundaiion  of  salable  merchandise  or  collectible  debts.  Loans, 
credits  or  advances  that  rest  on  fixed  property,  no  matter  how  safe  they 
may  ultimately  be,  are  not  such  as  a  banker  can  properly  make,  or  should 
be  asked  for. 

Even  when  security  on  real  estate  may  lawfully  be  taken  by  a  bank, 
as  is  the  case  in  England  and  Scotland,  it  is  always  understood  that  mer- 
chandise must  be  possessed  by  the  borrower  to  cover  it.  The  property  is 
not  considered  as  the  foundation  of  the  loan,  as  is  the  case  with  a  mort- 

In  the  same  manner,  and  entered  in  the  same  books  as  trade  bills  discounted, 
although  the  transactions  they  represent  are  radically  different.  The  practice  In 
England  and  Scotland  renders  such  confounding  of  loans  and  discounts  impossible. 
Loans  or  advances  are  made  by  means  of  what  bankers  here  call  "overdrafts;" 
the  balance  of  the  current  account  of  the  customer  being  allowed  to  run  on  the 
debit  side  for  a  specified  term,  up  to  a  specific  amount  agreed  upon.  Such  debit 
balances  are  usually  secured.*  The  security,  however,  is  not  given  by  the  simple 
endorsement  of  a  promissory  note,  but  by  a  formal  guarantee  duly  signed,  sealed 
and  delivered;  or  it  may  be  by  a  mortgage  of  such  property  as  the  law  allows  to 
be  taken  as  a  basis  for  bank  advances.  This  mode  of  making  advances  is  called 
in  Scotland  the  "Cash  Credit"  system.  But  the  system  of  English  banks  is  prac- 
tically the  same.  Both  agree  in  establishing  a  distinction  between  money  lent^ 
to  a  customer  and  trade  bills  discounted  for  him. 


96  BANKING    AND    COMMERCE. 

gage  company  or  capitalist,  but  as  collateral.     Tlie  means  of  ordinary  re- 
payment are  always  considered,  and  this  must  consist  of  merchandise. 

This  being  premised,  various  classes  of  banking  loans  will  now  be 
brought  under  review,  for  the  purpose  of  pointing  out  the  conditions 
whicli  govern  them  respectively,  and  the  proper  mode  of  dealing  with 
them. 

Loans  Coxxected  With  Agricultural  Pursuits. 

First  amongst  these  come  loans  or  advances  to  the  cultivator  of  the 
soil,  the  farmer.  Loans  to  farmers  are  the  common  staple  of  the  business 
of  branches  of  banks  in  rural  districts,  and  the  accusation  made  against 
chartered  banks,  that  as  a  rule,  they  refuse  to  make  such  loans,  is  without 
foundation.  But  a  bank  cannot  l)e  expected  to  lend  money  to  every 
farmer  who  applies  for  it. 

If  a  farmer  wishes,  as  he  sometimes  does,  to  borrow  money  to  build  a 
new  house,  or  to  make  a  payment  on  his  land,  or  to  improve  his  barns  and 
stables,  still  less  if  he  wants  to  buy  more  land,  he  cannot  be  surprised  if 
the  banker  refuses  to  lend,  for  none  of  these  will  furnish  the  means 
within  themselves  of  repayment.  That  could  only  be  had  by  forcing  the 
guarantor,  or  by  selling  the  borrower's  property.  Further,  if  the  appli- 
cant is  known  to  be  dilatory,  or  unsteady,  or  unreliable  in  his  representa- 
tions, he  cannot  expect  a  banker  to  part  with  his  money  in  his  favor,  no 
matter  how  good  a  guarantor  he  offers.  The  fact  that  a  farmer's  land  is 
heavily  mortgaged,  or  that  he  does  not  own  the  property  at  all,  are  cir- 
Ciunstances  very  unfavorable  to  borrowing,  but  if  the  farmer  is  a  man  of 
respectable  character  whose  promise  can  be  relied  upon,  and  can  offer  a 
good  guarantor,  he  may  reasonably  ask  for  a  loan  from  a  bank  for  the 
following  purposes: 

1.  He  may  require  an  advance  for  the  purpose  of  buying  seed,  pre- 
paring his  land  for  a  crop,  meeting  the  expenses  of  gathering  in  and 
harvesting,  all  having  in  view  the  resulting  crop. 

2.  A  farmer  whose  principal  occupation  is  breeding  horses,  cattle  or 
sheep  may  reasonably  ask,  and  the  banker  may  reasonably  lend,  as  much 
money  as  will  buy  such  stock  as  will,  when  fattened,  be  sold  off  the  farm. 
In  this  case  as  in  the  former  the  money  loaned  will  furnish  from  within 
itself  the  means  of  repayment.  But,  obviously,  more  care  is  needed  for 
this  kind  of  business  than  the  other. 

3.  In  a  dairy  district  a  farmer  whose  principal  product  is  butter  or 
cheese,  or  raw  material  for  making  them,  will,  as  a  rule,  need  to  borrow 
less  than  one  who  has  to  depend  on  his  crops,  for  returns  of  dairy  prod- 
ucts are  more  rapid.  But  lie  may  reasonably  ask  an  advance  for  such  a 
moderate  amount  as  is  required  to  buy  fodder  sit  certain  seasons,  or  as  is 
represented  by  the  amount  accumulating  at  his  credit  in  the  books  of  a 
cheese  factory.  (Care,  however,  is  needed  here,  for  this  money  is  some- 
times not  forthcoming.) 

But  in  the  last  two  cases  a  banker  needs  to  watch  that  his  money  is 


LOANS.  97 

not  used  to  buy  stock  for  the  working  of  the  farm;  and  that  cannot  be 
sold  witlioiit  detriment.  If  he  does,  althougli  the  position  is  not  so  un- 
pleasant as  if  his  money  were  locked  up  in  the  land,  he  will  still  have  a 
dead  loan  or  lock-up  on  his  hands,  and  commonly  require  to  obtain  pay- 
ment by  an  unpleasant  amount  of  ])rcssure.  In  all  dealings  with  farmers 
the  banker  will  need  to  take  care  that  his  money  is  not  used  to  pay  debts. 
Almost  every  farmer  has  other  creditors.  Hence  it  is  reasonable  that  a 
farmer  shall  be  asked  to  state  his  position,  what  he  owes,  when  it  is  due, 
and  whence  will  come  the  funds  to  pay  it. 

In  a  country  district  a  banker  will  naturally  acquire  such  a  knowledge 
of  a  farmer's  business  as  will  enable  him  to  judge  whether  he  is  borrow- 
ing a  reasonable  amount,  considering  the  size  of  his  farm,  or  the  extent 
of  his  dairy  operations. 

Some  bankers,  whose  whole  experience  has  been  with  city  business, 
have  a  dislike  to  lending  money  to  farmers,  as  a  slow  and  unprofitable 
style  of  business.  But  in  the  rural  parts  of  Canada,  and  the  United 
States,  as  well  as  in  England,  'dealing  with  farmers  has  generally  been 
found  desirable  and  satisfactory.  Loans  to  farmers  rarely  result  in  loss 
if  made  with  any  degree  of  prudence,  and  often  result  in  borrowers  be- 
coming stead V  depositors. 

Passing  from  the  farmer  himself  to  the  man  who  deals  in  his  products, 
we  are  introduced  to  a  class  of  loans  of  a  more  extensive  character.  In- 
deed, the  operations  of  the  men  who  buy  the  products  of  the  farmer  are 
so  large  as  to  have  given  rise  to  several  well-marked  lines  of  subdivision. 
One  class  confine  themselves  to  grain,  others  to  cheese  and  htitter,  others 
to  wool,  others  to  cattle,  others  to  hogs. 

The  country  storekeeper,  indeed,  may  buy  from  the  farmers  about  him 
more  than  one  of  this  variety  of  products;  but  at  the  next  move,  there 
will  be  found  a  differentiation.  The  larger  grain  merchants  buy  grain 
and  nothing  else,  the  wool  merchants  wool,  and  so  on  with  the  rest.  The 
dealings  of  each  of  these  classes  with  a  banker  are  of  a  character  in- 
volving a  different  style  of  risks,  and  demanding  a  distinct  line  of  treat- 
ment. 

The  Grain  Trade. 

The  most  important  of  these  is  the  grain  trade. 

This  trade  is  one  of  large  transactions,  quick  returns,  considerable 
risk,  and  small  average  profits ;  with  possibilities,  however,  of  heavy  gains 
at  one  time,  and  heavy  losses  at  another.  It  is  a  trade,  too,  in  which  large 
speculative  operations  are  constantly  going  on  in  great  centres.  It  af- 
fords fewer  instances  than  any  other  of  permanent  prosperity,  and  more 
instances  than  any  other  of  men  who  after  a  lifetime  of  dealings  aggre- 
gating millions  have  ended  their  career  in  poverty.  Yet  no  trade  renders 
more  valuable  service  to  the  country.  The  movement  of  crops  to  market 
sets  all  the  wheels  of  commerce  in  motion.  The  men,  therefore,  who  per- 
form this  service  are  entitled  to  honorable  recognition  in  the  community, 
and  to  a  considerate  hearing  from  a  banker  when  they  apply  for  advances. 


P8  BANKING    AND    COMMERCE. 

But  in  dealing  with  such  applications  the  banker  will  need  to  exercise  all 
the  faculties  of  judgment,  caution  and  experience  he  possesses.  The  ac- 
counts of  grain  merchants  are  among  the  most  profitable  and,  in  many 
respects,  the  most  indirectly  advantageous  that  a  bank  possesses.  They 
ran  be  carried  on  Avith  much  facility  in  Canada,  owing  to  the  admirable 
system  of  circulation  the  country  enjoys.  The  turn-over  is  large,  the  re- 
turns rapid,  and  the  advances  give  rise  to  numerous  bills  of  exchange,  both 
inland  and  foreign,  yielding  collateral  profits.  Yet  a  prudent  banker  will 
never  forget  that  the  business  is  accompanied  with  unusual  risks.  When, 
therefore,  a  grain  merchant  proposes  to  obtain  advances,  the  first  con- 
sideration will  be  how  much  capital  he  has  of  his  own,  and  in  what  shape 
that  capital  exists.  For  the  amount  of  such  capital  and  the  shape  in 
which  it  is  held  furnish  an  exact  index  to  the  amount  he  may  reasonably 
borrow.  No  man  has  the  right  to  hold  grain  on  borrowed  money,  without 
having  his  own  capital  as  a  margin  against  loss  to  the  lender.  How  much 
per  cent,  this  margin  should  be,  will  depend  on  the  season  and  the  state 
of  the  trade;  but,  obviously,  the  higher  the  price,  the  higher  per  cent, 
should  be  the  margin.  In  such  circumstances  there  is  more  room  for  a 
fall,  and  more  chance  for  a  holder  and  even  the  bank  itself  to  lose. 
When,  therefore,  a  banker  knows  with  reasonable  assurance  what  his  pro- 
posed customer's  capital  is,  he  can  calculate  how  much  it  would  be  rea- 
sonable to  lend  him. 

But  this  is  only  the  first  step.  It  would  be  most  unwise  for  a  banker 
to  lend  any  man  money  to  buy  grain,  unless  the  borrower  had  a  good 
knowledge  of  the  trade.  Yet  this  is  often  wanting.  The  grain  trade  is 
the  easiest  of  all  trades  for  a  man  to  venture  upon.  If  he  has  a  little 
money  he  can  open  an  office  anywhere  and  announce  himself  a  buyer  of 
wheat.  If  in  the  country,  farmers  will  certainly  come  to  him  and  sell  for 
cash.  If  in  a  city  he  can  go  on  Change  like  any  other  man,  or  employ  a 
broker  to  do  it,  buying  and  selling  to  his  heart's  content,  as  long  as  he 
has  money  to  put  up  a  margin.  He  needs  no  warehouse,  no  store,  or 
factory,  or  water  power,  or,  in  fact,  anything  whatever  such  as  men  need 
in  other  lines  of  business. 

This  facility  is  the  special  danger  of  the  business ;  and  experience 
proves  that  when  a  man  enters  upon  it  in  this  style  he  will,  before  long, 
be  ruined.  The  temperament  of  the  borrower  is  a  matter  to  be  considered. 
The  grain  trade  is  a  dangerous  one  to  a  man  of  sanguine  temperament.  A 
man  of  this  sort  who  has  borrowed,  let  us  say,  $10,000,  from  a  bank,  may, 
instead  of  buying  that  amount  of  wheat,  be  drawn  into  putting  up  the 
money  as  a  margin  for  his  share  in  some  deal  or  "corner."  This  has 
happened,  as  will  be  seen  in  a  subsequent  chapter.  The  risk  of  $10,000 
worth  of  wheat  he  could  legitimately  carry;  but  the  risk  of  ten  or  twenty 
times  as  much  would  plunge  him  far  out  of  his  depth. 

Even  if  he  avoids  speculation,  a  sanguine  man  is  apt  to  persist  in  hold- 
ing for  a  rise  when  he  ought  to  sell,  and  pay  off  his  advances.  To  a 
b'lnker's  remonstances,  such  a  man  always  has  a  plausible  theory,  which 


LOANS.  99 

to  him  is  a  demonstration,  why  prices  must  inevitably  advance.  He 
tnerefore  holds  on  until  a  loss  is  incurred  sufficient  to  ruin  him.  An  ex- 
ample of  this  is  also  given. 

It  may  indeed  be  laid  down  as  an  axiom  that  none  but  a  cautious  man 
is  fit  for  the  grain  trade.  He  should  also  be  a  man  of  moderate  ideas, 
and  willing  to  sell  when  a  sound  profit  can  be  made.  One  of  the  few 
survivors  of  the  heavy  grain  dealers  of  former  years,  in  this  country,  has 
attributed  his  being  able  to  stand  while  others  were  falling  to  the  fact  he 
was  always  willing  for  some  other  person  to  take  the  last  cent  of  profit. 

Another  important  point,  but  one  often  lost  sight  of,  is  that  a  grain 
merchant  needs  to  have  a  certain  line  of  customers;  exactly  as  a  dry  goods 
mcrcliant  has.  The  man  who  buys  grain  in  the  market  for  all  the  world 
in  general,  so  to  speak,  without  any  idea  who  is  going  to  buy  from  him, 
is  one  of  those  whose  mercantile  course  is  generally  short.  Such  buying 
does  not  deserve  the  name  of  trade.  It  is  simply  speculation.  All  suc- 
cessful grain  merchants  buy  with  a  definite  purpose  in  view.  They  have 
a  connection,  at  home  or  abroad.  They  know  that  certain  varieties  are 
wanted  by  certain  people,  or  in  certain  markets.  Commonly,  or  frequent- 
ly, they  have  orders  from  millers  or  distant  merchants.  Millers  who  are 
perfectly  good,  but  whose  operations  are  not  large  enough  to  go  into  a 
wide  market  themselves.  These  are  legitimate  customers.  So  are  the 
merchants  of  foreign  cities  like  Liverpool,  London,  Glasgow  or  Antwerp, 
who  maintain  a  constant  correspondence  with  Canada  indicating  their 
particular  wants,  and  not  seldom  making  firm  offers  to  buy.  These  are 
all  legitimate  forms  of  outlet  to  a  grain  merchant  on  this  side  the  Atlantic. 
But  the  man  who  buys  without  any  specific  purpose,  and  sends  his  stock 
to  a  foreign  market  on  consignment,  trusting  to  the  mere  chances  of  the 
market,  and  having  no  idea  who  will  be  the  real  buyer  of  his  stock,  is 
pursuing  a  road  which  sooner  or  later  leads  to  ruin.  Of  this  also  a  con- 
spicuous example  is  given  in  a  subsequent  chapter. 

Loans  on  Warehouse  Receipts. 

The  amount  of  a  reasonable  credit  to  a  grain  merchant  has  already 
been  discussed.  It  remains  now  to  consider  the  important  question  of 
Security. 

Except  for  such  moderate  amounts  as  may  be  advanced  to  the  grain 
dealer  of  a  small  village — generally  the  storekeeper — the  time  when  per- 
sonal guarantors  or  endorsers  were  commonly  offered  has  long  passed  by. 
The  amounts  are  too  large  for  such  a  form  of  security  to  be  taken.  But 
as  there  was  necessity  for  the  trade  to  be  carried  on,  and  an  almost  uni- 
versal necessity  for  bank  advances  to  do  it,  special  forms  of  legislation 
were  devised  by  which  the  grain  itself  could  be  pledged  as  security.  The 
ordinary  chattel  mortgage  was  seen  to  be  ineffectual,  as  too  slow  in  opera- 
tion, and  too  formal  in  character  for  so  quick-moving  a  trade.  A  special 
style  of  pledge  was  therefore  legalized,  giving  the  same  rights  and  pow- 
ers as  a  mortgage,  yet  of  so  simple  a  character  that  men  of  business  could 


100 


BANKING    AND    COMMERCE. 


use  il  without  the  intervention  of  a  lawyer.  This  special  style  of  pledge 
was  a  warehouse  receipt,  and  was  so  framed  as  to  give  the  bank  advanc- 
ing upon  it.  in  theory  at  least,  the  same  power  over  the  commodity  as  if 
he  had  it  locked  up  in  a  warehouse  of  his  own,  always  supposing  the 
document  to  be  genuine. 

The  idea  of  such  security  has  been  developed  as  circumstances  arose 
by  amending  and  enlarging  enactments,  some  of  them  anything  but  rea- 
sonable, but  in  its  original  and  natural  form  the  document  was  an  acknowl- 
edgment bv  the  keeper  of  a  warehouse  that  he  had  so  many  bushels  of 
grain  in  his  possession,  which  he  would  deliver  to  the  owner  when  called 
for,  or  to  his  order.  Such  receipts  were  natural  as  between  the  owner 
of  grain  and  the  owner  of  the  warehouse,  and  were  in  use  long  before 
there  Avas  any  special  legislation  about  them.  The  legislation  was  to  en- 
able the  owner  of  grain  to  make  a  legal  transfer  to  a  bank,  not  of  the 
document  merely,  but  of  title  to  the  grain  itself,  so  that  a  banker  would 
become  as  much  the  OAvner  of  the  grain  as  if  he  had  bought  it ;  with,  how- 
ever, two  important  limitations.  The  banker  was  debarred  from  selling 
the  property  without  giving  ample  notice  and  could  of  course  only  sell 
what  would  cover  his  advance.  Both  were  most  reasonable.  But,  on 
the  other  hand,  the  banker's  right  to  the  grain,  after  making  an  advance 
upon  it,  was  made  absolute  as  against  the  claim  of  any  other  creditor,  even 
of  the  party  who  had  sold  the  grain,  in  case  he  had  not  been  paid  for  it. 
This  provision  was  absolutely  necessary  to  the  safety  of  loans  made  on  the 
security  of  such  property,  and  the  whole  trading  community  have  acqui- 
esced in  them  as  being  for  their  advantage.  For  they  well  know  that  the 
more  perfect  the  security,  the  more  easy  it  is  to  obtain  advances  on  it,  and, 
other  things  being  equal,  the  more  moderate  the  rate  of  interest. 

The  law  contained  another  provision  of  a  perfectly  equitable  nature, 
viz.,  that  the  document  could  only  carry  such  powers  when  it  had  been 
lodged  at  the  time  the  advance  was  made.  It  was  seen  to  be  unreasonable 
that  a  man  should  be  able  to  pledge  grain  to  a  banker  as  security  for  an 
old  debt,  and  that  such  banker  should  have  a  preference  even  over  an 
unpaid  vendor.*'*  The  law  intended  that  the  loan  secured  by  the  pledge 
should  always  be  connected  with  the  pledge  itself. 

But  as  time  went  on,  and  circumstances  transpired,  two  amendments 
were  made.  The  most  important  of  these  was  that  a  man  might  pledge 
grain  (and  other  specified  agricultural  ])roducts)  when  stored  in  his  own 
warehouse;  and  tliat  this  pledge,  when  properly  transferred,  should  give  a 
banker  the  same  rights  as  the  receipt  of  a  warehouse  keeper  would  give. 
This  was  to  meet  the  case  of  grain  buyers  in  towns  and  villages,  where  no 
public  warehouses  exist,  and  M-hose  purchases  were  therefore  stored  in 
warehouses  or  sheds  of  their  own.     It  had  reference  also  to  the  dealers  in 

40  There  is,  however,  nothing  to  prevent  a  borrower  from  giving  a  warehouse 
receipt  to  a  bank  as  security  for  an  antecedent  debt  if  he  pleases.  But  in  that 
case  the  document  will  give  the  bank  no  right  to  hold  the  grain  as  against  other 
creditors.     The  banker  can   only  take   the   receipt  for   what   it   Is  worth. 


LOANS.  101 

other  agricultural  products,  such  as  cheese  and  pork,  who,  even  in  large 
cities,  almost  universally  store  their  goods  in  warehouses  which  they 
either  own  or  lease.  The  other  amendment  was  intended  to  obviate  the 
difliculty  experienced  by  dealers  of  small  capital  in  comjilying  with  the 
clause  tliat  a  warehouse  receipt  to  be  elFeetual  must  be  lodged  at  the  time 
of  the  advance.  The  dealer  in  this  case  must  have  bought  and  ware- 
housed tlie  grain  before  getting  an  advance  upon  it.  But  many  dealers  had 
not  capital  enough  to  do  this,  or  had  their  capital  in  other  forms  thaii 
monev.  They  required  money  at  the  very  outset,  especially  when  deliv- 
eries were  active  and  heavy.  l<\irmerly  such  men  would  get  these  pre- 
liminary advances  on  the  security  of  an  endorser ;  but  as  this  became  neces- 
sarily difficult,  the  law  was  amended  so  as  to  allow  a  warehouse  receipt  to 
be  a  valid  security  even  if  lodged  after  the  advance  was  made.  But  only 
with  the  proviso  that  the  horrouer  must,  at  the  time  of  getting  the  ad- 
vance, have  given  a  written  prornise  to  lodge  the  warehouse  receipt  in 
question.  The  law  thus  carried  out  its  original  intention  to  make  a  dis- 
tinct connection  between  the  advance  and  the  security. 

These  amendments  were  all  intended  to  facilitate  borrowing  by  grain 
dealers  (and  dealers  in  other  products  of  the  farm)  by  enlarging  the 
power  to  create  warehouse  receipts  and  use  them  as  security.  But  bank- 
ers have  long  ago  found  out  that  though  the  amendments  enlarged  the 
powers  of  borrower  and  lender,  they  were  far  from  enlarging  the  secur- 
ity in  the  same  proportion. 

For  the  difl'erence  in  the  security  afforded  by  a  receii^t  given  by  a 
warehouseman  for  property  stored  with  him  by  another,  and  the  pledge 
of  a  man  who  has  stored  goods  in  his  own  warehouse  is  almost  inconceiv- 
able. In  the  one  case,  the  banker  has  the  written  assurance  of  a  per- 
fectly independent  party,  that  the  grain  exists,  that  he  has  got  it  for 
safe  keeping,  and  that  he  will  not  part  with  it  except  on  the  return  of  the 
document.  In  the  other  ease,  there  is  no  independent  person  to  give  the 
assurance.  But  this  is  the  feature  that  gives  its  peculiar  value  to  such 
a  documenl.  Take  this  away  and  the  banker  has  absolutely  nothing  but 
the  honor  of  the  borrower  to  fall  back  upon,  guarded  of  course  by  the 
same  penalties  as  are  applicable  to  the  man  who  holds  the  property  of 
another. 

There  is  as  much  difi'creiiee,  therefore,  in  jioint  of  real  security  be- 
tween an  independent  warehouse  receipt  and  a  man's  own  pledge,  as  there 
is  between  a  man's  own  ])romissory  note,  and  a  good  trade  bill.  Yet  such 
pledges  have  their  value.  If  the  grain  exists,  a  pledge  will  hold  it  against 
creditors ;  though  it  is  always  in  the  owner's  power  to  remove  it.  And  as 
to  whether  the  pledged  grain  exists,  there  is  the  point  that  to  write  out 
a  pledge  for  grain  that  does  not  exist  is  so  deliberate  a  fraud  that  it  is 
perhaps  as  rare  as  forgery. 

The  same  lack  of  real  security  (though  there  is  an  appearance  of  it") 
is  found  in  the  taking  of  a  written  promise  to  lodge  a  warehouse  receipt. 
The  only  value  it  has  is,  that,  if  when  a  warehouse  receipt  comes  to  bo 


102  BANKING    AND    COMMERCE. 

pledged,  that  receipt  will  hold  the  grain  although  the  advance  was  not 
made  simultaneously  with  its  delivery. 

^Iemor.vxd\    ox    Warehouse    Receipts — Being    Extracts    From    an 
Address  on  Own  Receipts  and  Pledges,  to  the  Stockholders 

OF  THE   MeP.CHANTs'   BaNK    OF   CaNADA. 

"As  the  productions  of  the  country  became  more  and  more  diversified, 
it  was  important  to  grant  facilities  for  enabling  banks  to  lend  money  to 
purchase  them. 

So  from  time  to  time,  the  scope  of  the  act,  i.  e.,  The  Warehouse  Act, 
was  enlarged.  And  the  intention  of  the  Legislature  in  these  successive 
enlargements  is  clearly  shown  by  the  title  of  one  of  the  acts.  It  was 
called  'an  act  granting  additional  facilities  in  commercial  transactions.' 
a  very  proper  title,  too. 

So  when  hogs  became  an  important  farm  product,  pork  was  included; 
then  hides  and  wool,  then,  as  maltsters  and  distillers  were  large  pur- 
chasers of  farm  products,  maltsters  and  distillers  were  included.  Finally, 
the  matter  was  summed  up  in  general  terms  of  the  products  of  agricul- 
ture, the  forest,  the  mine,  the  sea,  lakes  and  rivers,  together  with  live  and 
dead  stock,  in  addition  to  which  manufacturers  were  allowed  to  borrow  on 
pledge  of  goods  of  their  own  manufacture,  or  raw  material  therefor. 

Down  to  the  very  last  revision  of  the  Warehousing  Act,  the  great 
object  was  kept  in  view  of  affording  facilities  for  obtaining  money  on 
goods,  wares  and  merchandise:  without  which  the  true  value  of  all  our 
products  would  never  be  obtained,  and  the  wheels  of  commerce  and  indus- 
try stand  still. 

The  men  who  sat  on  the  various  Parliamentary  committees  on  this 
subject  were  nearly  all  men  of  business,  who  had  a  practical  acquaint- 
ance with  the  needs  of  the  country.  They  knew  the  vital  importance  of 
affording  banking  facilities  to  the  dealers  in  the  country's  products,  and 
from  time  to  time,  as  the  act  was  reconsidered,  they  kept  this  object  stead- 
ily in  view.  Yet  they  showed  their  wisdom  in  the  safeguards  with  which 
they  surrounded  the  business,  and  particularly  witli  regard  to  the  right  of 
an  unpaid  vendor.  And  to  show  how  equitably  the  matter  is  worked, 
though  transactions  of  this  kind  have  amounted  to  millions  every  year, 
and  to  hundreds  of  millions  in  all,  the  claims  that  have  been  made  bv 
unpaid  vendors  have  amounted  to  an  infinitesimal  fraction. 

But  now  a  mode  of  looking  at  this  class  of  business  has  arisen 
(through  decisions  of  judges)  which  will,  if  carried  on,  go  largely  to 
defeat  the  object  intended  by  the  Legislature.  This  is  founded  on  what 
I  must  consider  to  be  an  extraordinary  misconception.  It  has  l)een  as- 
serted in  various  quarters  that  the  general  principle  of  legislation  is  that 
banks  shall  not  make  advances  on  goods,  wares  and  mercliandise,  and 
that  the  cases  in  which  it  can  be  done  must  be  taken  as  exeej^tions  to  a 
general  rule.  This  idea  is  not  only  contrary  to  the  fundamental  rules 
of  all  banking,  but  to  the  spirit  and  intention  of  all  tjie  foregoing  legisla- 


LOANS.  10:5 

tion.  To  legislate  that  banks  shall  not  make  advances  on  goods,  wares 
and  merchandise  as  a  general  rule,  -would  be  equivalent  to  a  legislation 
that  a  saw  miller  shall  not  manufacture  lumber  as  a  rule,  or  that  a  dry 
goods  merchant  shall  not,  as  a  rule,  sell  cotton,  or  that  a  farmer,  as  a 
rule,  shall  not  grow  wheat. 

The  very  essence  of  the  business  of  a  banker  is  to  advance  on  goods, 
wares  and  merchandise,  either  in  the  shape  of  discounting  bills  repre- 
senting goods  sold,  or  making  loans  to  enable  goods  to  be  purchased  or 
held.  And  the  whole  object  of  the  Warehouse  Receipt  legislation  is  to 
enable  such  advances  to  be  got  at  the  cheapest  rate  by  basing  them  on 
actual  merchandise.  The  restrictive  clause  of  the  Act  is,  that  advances 
on  goods  shall  not  be  made  except  as  provided  by  the  Act.  But  the  Act 
itself  opens  the  door  to  a  wide  enough  range  of  transactions,  and  the 
limitation  plainly  means  that  banks  shall  not  lend  on  goods  as  a  pawn- 
broker does,  or  keep  warehouses  to  store  them  in  as  the  Bank  of  Germany 
does,  and  also  that  a  storekeeper  or  a  dry  goods  merchant  who  buys  goods 
on  credit  shall  not  have  the  power  of  pledging  them  for  bank  advances. 
It  is  true  that  the  Act  gives  the  lender  of  the  money,  when  he  advances  on 
goods,  a  right  to  them,  even  over  an  unpaid  vendor — a  very  strong  pro- 
vision, and  showing  how  strong  was  the  desire  of  Parliament  to  facilitate 
loans  on  merchandise.  But  it  is  safeguarded  by  restricting  the  opera- 
tion of  the  Act  to  cases  in  which,  as  a  rule,  there  is  no  unpaid  vendor. 
Any  other  limitation,  I  venture  to  think,  should  always  be  interpreted 
reasonably  and  liberally,  and  with  due  regard  to  the  great  object  intended 
to  be  accomplished  by  the  Legislature,  and  to  the  vast  importance  of  such 
advances  to  the  country  at  large  in  its  increasing  development. 

An  Act  of  Parliament,  as  we  know,  may  be  variously  interpreted;  in 
fact,  it  is  impossible  to  frame  clauses  that  are  not  susceptible  of  divers 
interpretations.  Lf  such  interpretations  are  of  a  nature  to  hamper  and 
embarrass  banks  in  assisting  merchants  to  handle  the  products  of  the 
country,  they  cannot  be  for  the  good  of  the  community,  but  very  much  to 
its  detriment." 


CHAPTER   XV. 

LOANS  TO  DEALERS  IN  GRAIN  AND  OTHER  AGRICULTURAL 
PRODUCE.— Continued. 

Difference  in  Warehouse  Receipts — Cheese  and  Butter — Advances 
FOR  Dealing  in  Cattle — Pork — Hides — Wool  and  Hay. 

"I3  URSUIXG  the  subject  of  independent  warehouse  receipts,  it  may 
-i-  be  noted  that  they  are  by  no  means  all  equal  in  quality.     If  given 

by  a  private  individual,  a  banker  needs  to  make  enquiry  as  to  his 
reliability  before  advancing  money  on  his  receipts,  for  sometimes  the 
relations  between  a  warehouseman  or  wharfinger  and  the  borrower  of 
money  are  closer  than  is  desirable.  Without  any  intention  to  defraud,  a 
warehouseman  has  sometimes  been  induced  to  give  a  receipt  for  goods 
before  he  has  obtained  them,  trusting  to  his  customer  sending  them  on. 
There  is  a  particular  temptation  to  do  this  in  these  days  of  exceptionally 
heavy  deliveries,  which  are  common  in  the  grain  trade.  Such  cases  are, 
of  course,  rare,  and  every  warehouse  knows  it  to  be  a  dangerous  business. 

The  receipts  of  a  railway  corporation  or  a  city  warehousing  company 
are  the  most  reliable  a  banker  can  have.  This  is  especially  the  case  when 
a  banker  is  making  advances  in  the  grain  centres  of  the  United  States.  In 
Chicago  and  Minneapolis  the  system  by  which  warehouse  receipts  are 
registered  and  checked  renders  them  exceptionally  valuable  as  a  security. 
Error  or  fraud  are  practically  impossible  in  connection  with  them.^^ 

When  a  borrower  can  present  documents  of  this  kind,  insurance  in  all 
cases  being  effected  in  favor  of  the  bank,  advances  may  be  safely  made  to 
a  far  greater  extent  than  when  they  are  secured  by  guarantee  or  by  a 
dealer's  own  pledge.  In  all  such  cases  a  margin  is  required  and  given,^ 
and  if  the  margin  is  well  looked  after,  loss  is  practically  impossible,  so 
long  as  the  grain  is  in  the  warehouse. 

There  is,  however,  a  danger  which  arises  out  of  the  necessity  for 
parting  with  the  receipt  when  the  time  comes  for  grain  to  be  delivered.  It 
is  practically  impossible  for  the  ordinary  dealer  to  pay  for  the  grain 
before  it  is  delivered,  yet  witliout  possession  of  the  receipt  the  warehouse 
company  will  not  allow  it  to  be  moved.  The  bank  cannot  attend  to  this 
matter  of  shipment;  none  but  the  owner  can  do  it,  but  to  do  it  he  must 

41  But  Canadian  bankers  who  have,  during  some  years,  advanced  money  to 
grain  merchants  in  Duluth  and  Minneapolis  have  learned  by  experience  how 
much  difference  in  quality  there  is  between  receipts  technically  known  as  termi- 
nals; that  is,  those  given  by  the  great  warehouses  at  the  terminal  of  a  railroad, 
and  those  given  by  small  country  elevators  situated  along  the  line.  The  former 
have  invariably  proved  satisfactory.  The  grain  never  failed  of  delivery.  But  the 
latter  were  not  seldom  the  occasion  of  long  correspondence,  disputes,  lawsuits, 
and  injunctions— which  lasted  for  months  before  final  settlement  was  reached. 
104 


LOANS  TO  DEALERS  IN  GRAIN.         105 

have  the  warehouse  receipt  in  his  possession.  The  necessity  of  the  case 
has  given  rise  to  the  standing?  custom  in  such  cases  of  delivering  the 
document  to  the  borrower,  he  giving  the  banker  a  formal  pledge  by  which 
the  shipper  is  constituted  a  bailee  of  the  property  for  the  purjjose  of  sliip- 
ment  or  sale^  and  under  which  he  undertakes  to  account  for  the  proceeds 
if  sold,  or  to  bring  back  a  bill  of  excliange  if  shipped.  A  breach  of  this 
engagement  renders  the  party  liable  to  prosecution  for  fraud.  In  an 
active  shipping  season  the  amount  of  grain  in  transit  in  this  shape,  owned 
by  a  single  firm  at  a  particular  time,  is  often  very  large,  involving  large 
sums  of  money  for  which  the  banker  during  a  short  time  has  no  security 
but  the  borrower's  pledges. 

The  amount  of  these  in  Chicago  during  any  grain  season  runs  up  into 
millions,  yet  it  is  a  fact  that  failures  to  meet  the  engagement  of  a  bailee 
have  scarcely  ever  been  known,  even  in  such  a  vortex  of  speculation  as 
Chicago.  The  experience  of  other  grain  centres  has  not  been  materially 
different.  Yet  it  is  natural  for  bankers  who  have  large  grain  accounts, 
involving  the  necessity  of  temporarily  parting  with  security,  to  feel 
anxiety  when  many  sales  are  being  effected  at  the  same  time,  and  large 
amounts  are  afloat  on  the  mere  honor  of  borrowers.  These  are  times  that 
press  strenuously  on  a  banker's  attention  the  importance  of  having  honor- 
able men  as  borrowers,  even  if  at  the  outset  all  transactions  rest  on 
undoubted  security. 

When  the  borrower  brings  a  Bill  of  lading,  or  Railway  receipt,  for 
the  goods  he  is  shipping,  he  almost  invariably  draws  a  draft  against  them. 
The  bill  of  lading  being  attached  to  the  draft,  gives  to  the  banker  dis- 
counting it  the  same  rights  and  powers  over  the  property  that  the  ware- 
house receipt  does.  And  practically  most  of  the  risk  of  the  transaction 
is  then  at  an  end,  except  in  certain  cases  that  arise  in  foreign  ports. 
These  matters,  however,  are  dealt  with  under  the  head  of  foreign  bills. 

Owing  to  the  closing  up  of  navigation,  on  the  lakes  and  canals  of 
Canada  and  the  Northern  States,  it  is  sometimes  necessary  to  hold  grain 
for  many  months  in  warehouse.  To  send  it  by  rail  would  be  altogether 
too  costly.  It  would  destroy  tlie  profit  of  the  dealer,  unless  there  had 
been  a  large  advance  in  the  price.  Tliese  long  periods  of  holding  grain 
are  not  without  anxiety  to  bankers  wlio  have  made  advances  on  it,  for  the 
holder  may  be  at  the  mercy  of  the  market  for  a  long  period,  during  which 
neither  he,  nor  any  other  person,  can  move  the  grain.  In  former  days 
great  losses  have  resulted  to  merchants  from  this  circumstance,  and  not  a 
few  have  been  ruined  altogetlier  with  considerable  loss  to  their  bankers. 
Now,  however,  the  system  of  dealing  in  "futures"  and  "options"  has  be- 
come so  perfected  that  it  is  possible  for  a  holder  of  grain,  who  is  com- 
pelled to  carry  it  for  a  considerable  season,  to  guard  himself  from  loss. 
And  thus  the  very  speculation  in  grain,  which,  under  one  aspect,  is  in  a 
high  degree  baneful,  becomes  in  another  aspect  the  means  of  guarding  an 
ordinary  trader  from  risk.  Of  course,  such  contracts  for  future  delivery 
are  liable  to  fail  in  execution,  in  case  misfortune  overtakes  one  of  the 


J 06  BANKING    AND    COMMERCE. 

contracting  parties,  or,  in  case  he  becomes  involved  in  the  vast  operations 
of  one  of  those  speculative  "corners"  that  loom  up  now  and  then  in  the 
trade.  But  the  risk  of  this  is  small  compared  with  the  risk  of  long  win- 
ter holding. 

On  the  whole,  and  to  sum  up  the  matter  in  a  few  words,  the  banker,  in 
carrying  on  the  account  of  a  grain  merchant,  M'ill  need  first  to  be  thor- 
oughly satisfied  as  to  the  honorable  character  of  his  customer.  A  failure 
here  is  sure  to  end  in  trouble  sooner  or  later.  But  equally  necessary  it 
is  for  the  dealer  to  be  a  prudent  and  cautious  man;  for  the  grain  trade 
is —  of  all  others — the  most  dangerous  to  a  man  of  sanguine  temperament. 
With  customers  of  honor  and  prudence,  whose  capital  is  proportional  to 
the  amount  of  business  they  do,  and  who  understand  the  trade,  both  as  to 
the  article  itself  and  the  markets  for  buying  and  selling,  a  banker  may  do 
business  from  season  to  season  with  no  greater  liability  to  loss  than 
would  be  found  in  t]»e  average  of  occupations.  But  he  certainly  does 
need  to  be  on  the  watch  for  any  symptoms  of  a  speculative  spirit  in  his 
customer,  and  especially  of  his  taking  money  lent  to  him  for  the  purchase 
of  grain,  and  using  it  as  a  margin  for  speculative  operations. 

The  Tr.\de  Bills  drawn  by  grain  dealers  on  correspondents  are  dealt 
with  in  subsequent  pages. 

It  is  now  necessary  for  other  branches  of  the  trade  in  farm  products 
to  be  brought  under  review,  and  the  first  to  be  taken  up  will  be: 

The  Cheese  and  Butter  Trade. 

This,  as  is  well  known,  has  attained  verj^  large  dimensions  in  Canada 
during  the  last  quarter  of  a  century,  and  the  accounts  of  merchants  in  it 
are  amongst  the  largest  of  those  carried  on  by  Canadian  bankers.  Yet 
the  trade  in  cheese  and  butter  is  a  wholly  different  one  from  the  trade  in 
grain.  It  is  not  so  easy  to  enter  upon;  it  demands  far  more  special 
knowledge  of  the  article,  and  also  more  intimate  acquaintance  Avith  the 
markets  and  merchants  of  foreign  countries.  There  is  no  speculative 
centre  like  Chicago,  for  this  trade,  and  comparatively  little  of  that  buying 
and  selling  in  -which  tlie  article  is  never  handled  at  all.  And  though  the 
prices  fluctuate,  they  seldom  fluctuate  from  anything  but  natural  causes, 
such  as  the  abundance  or  scarcity  of  grass  and  fodder,  or  the  conditions 
of  the  markets  of  Great  Britain.  The  trade  is  not  in  many  hands;  and 
most  of  those  who  carry  it  on  are  men  of  knowledge,  experience  and  good 
connections  abroad,  !^^oreover,  the  small  dealers  in  country  places  are 
seldom  merchants  on  their  own  account,  but  act  as  agents  for  large  dealers 
in  cities.  The  transactions  of  banks  through  their  country  branches,  with 
this  class  of  men,  are  numerous,  and  involve  little  risk,  owing  to  the  fact 
that  they  are  almost  always  in  the  shape  of  drafts  from  city  dealers  duly 
autliorizcd.  A  large  part  of  the  cheese  and  butter  exported  from  Canada 
is  purchased  at  first  hand  from  farmers,  creameries  and  cheese  factories 
by  this  useful  class  of  men.  But  their  dealings  with  a  banker,  though 
numerous,  and  large  in  the  aggregate,  are  matters  which  jiractically  in- 
volve no  risk.     The  real  risk  begins  with  advances  to  the  cheese  merchant 


T.OANS    TO    DEALERS    IN    GRAIN.  107 

of  a  city.  These  advances,  as  in  the  case  of  grain,  and  other  analogous 
trades,  are  almost  invariably  arranged  beforehand  for  a  whole  season.  In 
considering  them  a  banker  has  to  give  unusual  weight  to  the  character  of 
the  borrower  for  honesty  and  reliability,  seeing  that  it  has  come  about, 
bv  force  of  circumstances,  that  cheese  and  butter  are  almost  invariably 
stored  in  warehouses  belonging  to,  or  leased  by,  the  merchant.  — 

The  ordinary  warehouse,  or  elevator,  has  not  the  appliances  necessary 
in  this  climate  for  the  safe-keeping  of  cheese  and  butter,  as  they  are  spe- 
cially liable  to  deterioration  under  changes  of  temperature;  from  all 
which  it  follows  that  much  more  of  the  security  tendered  in  this  trade  is 
in  the  shape  of  a  merchant's  own  receipts.  When,  therefore,  an  applica- 
tion is  made  for  advances  to  carry  on  a  season's  trade  in  these  articles, 
the  banker  needs,  above  all  things,  to  be  sure  of  the  men  he  is  dealing 
with.  If  the  applicants  be  a  firm,  with  one  or  more  partners,  the  character 
of  every  partner  is  a  matter  for  weighty  consideration.  If  during  the 
•currency  of  advances  an  additional  partner  is  taken  in,  that  also  should  be 
a  matter  for  consideration,  lest  an  unsound  element  be  allowed  to  creep 
in,  and  damage  the  stability  of  the  firm.-*- 

The  matter  of  knowledge  and  experience  in  the  trade  no  banker  will 
lose  sight  of  in  considering  an  application;  but  the  men  who  propose  to 
•obtain  advances  from  a  bank  to  buy  cheese  and  butter  are  seldom  deficient 
in  this  respect,  either  as  to  the  article  or  the  markets.  But  a  banker  will 
require  to  be  particularly  well  satisfied  as  to  the  applicant's  capital;  for 
it  may  be  taken  as  a  rule,  in  this  line  of  business,  that  the  capital,  in  pro- 
portion to  the  advances  asked,  should  be  large.  The  fluctuations  in  prices 
are  sometimes  rapid  and  very  considerable.^'  The  article  is  required  at 
times  to  be  held  in  large  quantities  and  for  long  periods,  at  the  risk  of  the 
market,  and  there  are  not  many  facilities  for  rapid  selling  in  a  falling 
market,  whereby  men  may  escape  loss.  There  are,  too,  more  dangers 
from  the  fluctuations  of  the  seasons,  and  the  suitableness,  or  otherwise, 
of  the  article  to  the  market  it  is  bound  for. 

All  these  considerations  naturally  lead  up,  not  only  to  the  require- 
ment of  a  large  capital  in  the  borrower,  but  that  his  capital  should  be  in 
some  available  shape,  in  case  of  a  bad  season,  unfavorable  markets  and 
loss  to  the  buyers. 

rz  Bankers  are  often  taught,  by  severe  experience,  how  dangerous  are  the 
risks  involved  in  the  change  of  the  personnel  of  firms.  A  father  may  build  up, 
by  years  of  prudence  and  honesty,  a  lucrative  and  prosperous  business:  sons 
grow  up  who,  being  taken  into  partnership,  may  destroy  the  work  of  a  lifetime 
by  a  few  years  of  incapacity  and,  possibly,  dishonesty.  Yet  the  name  of  the  firm 
may  be  the  same  as  before,  and  the  traditions  of  honorable  dealing  will  survive, 
although   the  foundation   for   it  has  disappeared. 

43  These  fluctuations  are  apt  to  appear  less  than  they  are,  owing  to  the  quo- 
tations for  cheese  and  butter,  even  in  the  wholesale  trade,  being  at  so  much  per 
pound.  The  rise  or  fall  of  a  cent  per  pound  sounds  like  a  very  small  affair,  yet  it 
may  amount  to  as  much  as  ten  to  fifteen  per  cent.,  according  to  the  price  of  the 
article.  Thus,  if  a  merchant  is  carrying  a  heavy  winter's  stock  (and  such  stocks 
are  sometimes  carried  of  a  value  of  two  or  three  hundred  thousand  dollars),  this 
seemingly  trifling  change  of  a  cent  per  pound  may  make  a  difference  of  twenty 
or  thirty  thousand  dollars  in  its  value.  The  changes  in  values  in  this  trade  are, 
in  truth,  heavier  than  in  the  grain  trade,  and  need  more  constant  watching. 


108  BANKING    AND    COMMERCE. 

This  trade  is  one  jjiving  rise  to  large  amounts  of  exports,  especially 
to  Great  Britain.  The  consmnption  of  cheese  is  much  larger  in  the  agri- 
cultural districts  of  l,oth  England  and  Scotland  than  in  Canada  or  the 
United  States. 

The  cheese  trade  in  Great  Britain  is  in  many  respects  as  diff'eront 
from  the  grain  trade  as  it  is  on  this  side  the  Atlantic.  It  is  not  so  rapid, 
so  changeable  or  so  speculative.  The  article,  moreover,  is  itself  a  finished 
product,  not  requiring  a  manufacturing  process  to  make  it  available.  It 
is,  therefore,  commonly  held  longer  in  stock,  and  as  it  cannot  be  held  in 
ordinary  warehouses,  it  comes  about  that  merchants  in  Great  Britain  must 
more  commonly  ask  for  bills  of  lading  to  be  given  up  on  acceptance,  in 
order  to  remove  the  stock  to  their  own  warehouses.  To  this,  of  course,  the 
banker  must  consent  if  it  is  to  be  done  at  all;  but  bankers  on  this  side 
are  usually  ready  to  meet  the  views  of  their  customers  in  this  matter,  as 
the  persons  in  the  trade  on  both  sides  the  Atlantic  are,  as  a  rule,  men  of 
capital  and  standing,  and  the  bill  will  have  two  presumably  good  names 
on  it,  even  M'heri  the  bill  of  lading  has  been  given  up.  So  great  is  the 
confidence  between  one  merchant  and  another  in  this  trade,  that  it  has  not 
been  luicommon  for  parties  in  England  to  accept  bills  drawn  against 
goods  tvarehoused  on  this  .side.  Experience,  however,  has  proved  this 
practice  to  be  exposed  to  peculiar  risks,  which  may  render  it  dangerous  for 
the  foreign  merchant,  and  unsatisfactory  for  the  Canadian  banker. 

The  Cattle  Trade. 

Passing  from  the  trade  in  dairy  products  to  the  trade  in  the  animals 
themselves,  we  enter  upon  another  set  of  considerations  altogether. 

Advances  for  the  purpose  of  dealing  in  cattle  or  feeding  them  com- 
monly begin  with  loans  to  small  dealers  in  country  districts  who  gather 
together  small  lots  and  sell  them  to  large  dealers  or  distillers.  These  ad- 
vances are  usually  of  moderate  amount,  and  such  short  time  that  they  can 
be  reasonably  secured  by  an  endorsement  or  guarantee.  Such  small  deal- 
ers, indeed,  are  sometimes  ambitious  to  become  exporters,  but  bankers  are 
usually  chary  of  encouraging  such  operations.  Small  dealers,  as  a  rule, 
have  neither  the  knowledge  of  foreign  markets,  nor  the  experience,  nor  the 
capital  necessary  lo  do  this  successfully.  Their  proper  business  is  to 
pass  on  the  animals  to  men  of  greater  weight. 

Of  these  some  of  the  most  prominent  are  Distillers.  The  advances  to 
distillers  for  the  purpose  of  feeding  cattle,  in  some  cases,  arc  on  a  large 
scale,  and  continued  for  a  considerable  time.  They  are  commonly  se- 
cured by  the  pledge  of  the  distilhr,  which  pledges  are  of  a  much  safer 
character  than  any  others  Iiindlcd  by  bankers;  the  reason  being  that  the 
animals,  having  once  entered  the  distillery,  are  never  removed  until  finally 
ship))ed  aM'.Mv.     An  inspection  of  them,  moreover,  is  perfectly  easy. 

When  I  he  process  of  fattening  is  completed,  and  the  time  has  arrived 
for  shipping,  they  are  generally  sent  in  a  live  state  across  the  Atlantic. 
Tlic   trade   of   sl)ip})ing   live  cattle   across   the   Atlantic   is   a    develo}):nent 


LOx\NS    TO    DEALERS    IN    GRAIN.  109 

of  recent  years;  and  until  it  was  better  understood  and  more  perfect  ship- 
ping facilities  were  devised  for  it,  it  was  attended  with  heavy  casualties 
and  losses.  This  trade  is  not  one  of  those  that  are  easy  to  enter  upon. 
None  but  men  who  are  familiar  with  cattle  ever  think  of  meddling:  with 
it.  It  has  been  proved  to  require  not  only  large  ca])ital  and  thorough 
knowledge  of  animals,-  but  first-rate  arrangements  for  handling  cattle  in 
Great  Britain.  Naturally,  it  is  a  far  more  difficult  business  to  handle 
live  animals  than  grain,  cheese,  or  pork.  They  are  exposed  to  far  more 
casualties  both  from  cold  and  heat.  The  risks  of  land  transport  are  con- 
siderable, but  the  risk  of  ocean  transport  is  immensely  greater.  But  per- 
haps the  greatest  risk  of  all  is  in  the  hot  days  of  summer  before  steamers 
are  well  out  at  sea.  The  risks  of  this  trade  are  considerably  augmented 
by  the  fact  that  tlie  cattle  cannot  be  held  in  an  English  port,  or  sent  into 
the  interior.  They  must  be  sold  and  slaughtered  at  once,  be  the  market 
bad  or  good,  the  price  high  or  low.  It  is  evidently  a  trade  therefore  for 
men  of  large  means,  and  for  no  others. 

With  regard  to  security  for  the  loans  of  bankers,  the  pledge  of  the 
dealer  in  the  case  of  live  animals  herded  or  yarded  is  of  the  weakest 
quality,  theoretically,  for  it  is  obviously  more  easy  to  take  cattle  away 
than  to  move  any  other  commodity.  The  case  is  entirely  different  with  the 
distiller,  for  the  cattle  in  his  byres  are  a  part  of  the  very  machinery  of 
his  business.  He  could  not  take  them  away  while  feeding  without  suf- 
fering heavy  damage.  But  the  cattle  dealer  can  make  away  with  his 
property  witliout  tlie  slightest  difficulty  if  he  chooses.  The  animals  can 
walk  oft"  by  themselves,  and  need  neither  trunks,  wagons  nor  carts  to 
transjjort  them. 

Yet  this  cattle  trade  is  one  of  the  most  important  that  Canada  has; 
and  with  the  development  of  the  Nortliwest,  with  its  great  stretches  of 
ranches,  is  becoming  increasingly  so.  And  in  the  hands  of  men  with  ade- 
quate capital  and  knowledge,  it  may  be  conducted  as  safely  as  any  other 
branch  of  export  business.  But  woe  to  the  men,  or  firms,  that  plunge  into  it 
without  these  requisites,  or  to  the  unfortunate  banker  who  is  beguiled  into 
lending  them  money.  And  one  consideration  will  be  found  by  bankers 
to  be  fundamental,  never  to  make  advances  or  buy  bills  against  cattle 
shipped  in   winter. 

Pork  and  Provision  Trade. 

In  this  trade  the  animal  itself  is  never  exported.  But  Canada  carries 
on  a  very  large  business  in  its  products,  and  some  of  them,  namely,  ham 
and  bacon,  are  figuring  heavily  in  our  list  of  exports.  The  trade  is  dif- 
ferent from  that  in  grain  or  cheese  in  this  respect,  that  the  portions  of  the 
slaughtered  animals  undergo  a  change  before  being  sold.  This  can  hardly 
be  called  a  manufneluring  process,  being  merely  salting  and  curing,  for 
which  reason  it  is  not  dealt  with  under  the  head  of  loans  to  manufactur- 
ers. Yet  the  packing  of  pork  (for  the  operation  goes  by  this  name)  is  a 
large  and  important  industry,  carried  on  in  costly  establishments,  fuU  of  a 
valuable  plant,  requiring  large  capital  to  carry  them  on. 

At  the  very  outset  the  question  arises,  when  considering  loans  for  this 


no  BANKING    AND    COMMERCE, 

business,  at  what  point  bank  advances  may  be  reasonably  asked  for,  and 
the  answer  must,  of  course,  be  given,  as  in  analogous  cases,  that  the  fac- 
tory should  be  completed  and  paid  for,  before  a  banker  is  approached. 
This  circumstance  will  be  in  itself  a  guarantee  of  the  borrower  possess- 
ing considerable  capital.  But  to  be  a  satisfactory  customer  to  a  bank  he 
certainly  ought  to  have  more  than  this;  viz.,  as  much  more  as  would 
enable  liim  to  provide  against  the  losses  of  an  unfavorable  season  without 
mortgaging  his  property. 

In  this  trade  security  oft'ered  to  a  banker  is  almost  invariably  a  pledge 
of  the  newly-slaughtered  animal;  the  law  allowing  the  pledge  to  subsist 
during  the  process  of  converting  it  into  pork,  ham,  or  bacon,  and  attach- 
ing to  the  finished  product. 

Again  must  be  emphasized  the  importance  of  a  continuously  good 
record  to  every  member  of  a  borrowing  firm,  both  at  the  time,  and  as  it 
may  be  subsequently  changed  by  the  entrance  of  other  partners.  It  is 
far  more  difficult  for  a  banker  to  judge  of  the  value  of  his  security  in  this 
business  than  in  any  of  the  foregoing.  And  there  are  hindrances  in  the 
trade  itself. 

Pork  packing  is  a  different  trade  from  the  curing  of  hams  and  bacon. 
Barrelled  pork  is  essentially  for  the  home  market,  being  the  staple  food 
of  hmiber  camps.  In  centres  like  Chicago,  barrelled  pork  is  often  spec- 
ulated in;  ''corners"  are  made  in  it,  and  the  fluctuations  in  its  price  are 
heavy.  There  is  the  same  reason  as  in  the  grain  trade  for  a  banker  to 
beware  of  his  advances  being  used  to  put  up  a  margin.  No  advances 
in  this  business  can  be  considered  safe  unless  to  men  of  solid 
temperament  and  judgment,  whose  capital  is  large  in  proportion  to  their 
business — and  who  understand  well  both  the  article,  the  process,  and  the 
markets. 

The  export  of  hams  and  bacon  to  Great  Britain  has  now  attained  large 
dimensions,  and  is  subject  to  the  same  conditions  as  pertain  to  other 
branches  of  the  export  trade.  It  requires  good  connections  on  the  other 
side  of  the  Atlantic;  it  should  be  conducted  on  the  principle  of  purchase 
and  sale,  and  not  of  consigning;  for  it  cannot  be  too  often  repeated  that 
consigning  is  the  road  to  ruin  in  this,  as  in  every  other  branch  of  the 
export  business. 

As  in  other  branches  of  production,  the  maker  of  hams  and  bacon  will 
find  it  highly  conducive  to  profit  to  establish  a  nanie  for  his  article,  as 
Armour  &  Co.  of  Chicago  have  done. 

The  special  danger  to  bankers,  in  this  line  of  business,  is  that  the 
packer's  building  and  plant  may  not  be  kept  abreast  of  modern  improve- 
ments; also  that  changes  in  the  firm  may  deteriorate  it,  new  members 
not  having  the  same  ability  as  the  old,  competent  and  able  fathers  being 
succeed  by  incompetent  sons.  (The  latter,  however,  is  not  peculiar  to  the 
pork  trade.) 

Hides  and  Wool. 

The  last  branch  of  agricultural  products  to  be  noted  is  the  trade 
in  hides  and  wool,  these  generally  going  together.     This  trade,  like  the 


LOANS    TO    DEALERS    IN    GRAIN.  Ill 

foregoing,  has  its  peculiarities,  and  special  sources  of  risk  and  danger. 
Hides  and  wool  are  articles  that  only  experts  can  deal  in,  for  no  out- 
sider can  possibly  tell  the  value  of  a  given  quantity  of  either  of  them. 
There  are  in  this  trade,  as  in  the  others,  small  dealers  and  large — the 
men  who  gather  up  small  lots  in  the  country,  and  the  men  who  have 
large  wholesale  dealings  in  the  city.  And,  as  in  other  branches  of  trade, 
the  small  dealer  is  sometimes  too  ambitious  for  his  means  and  experience, 
and  too  desirous  to  enter  upon  operations  that  he  has  neither  the  capital 
nor  the  ability  to  carry  on. 

Bankers  cannot  do  a  greater  service  to  a  man  of  this  class  than  to 
refuse  to  lend  him  sums  of  money  large  enough  for  wholesale  operations; 
for  it  is,  in  truth,  often  learned  at  a  bitter  cost,  that  many  a  man  in  trade 
has  been  ruined  by  having  too  free  a  use  of  money,  loaned  him  by  a  com- 
pliant banker. 

The  trade  in  hides  and  wool  provides  raw  material  for  two  important 
lines  of  manufacture;  viz.,  woolen  mills  and  tanneries.  In  both  of  these 
much  of  the  raw  material  is  produced  in  foreign  countries,  and  the  large 
merchants  in  wool  and  hides  become  importers  from  Australia  and  South 
Africa.  To  carry  on  these  operations  the  banker  is  asked  to  issue  to  his 
customer  letters  of  credit  authorizing  their  correspondents  to  draw  upon 
a  bank  in  London,  for  the  value  of  the  wool  or  hides  shipped,  attaching 
bills  of  lading  and  policies  of  insurance  thereto.  The  issuing  of  such 
letters  of  credit  is  a  special  branch  of  a  banker's  business  both  in  Canada 
and  in  the  United  States  and  is  treated  of  subsequently.  Its  special  ad- 
vantages and  risks  are,  there  completely  opened  up;  meanwhile,  it  is 
sufficient  to  say,  that  no  small  dealer  should  ever  be  encouraged  to  enter 
upon  this  line  of  operations.  For  the  losses  of  a  single  unfavorable  sea- 
son might  sweep  aAvay  all  he  had. 

Merchants  in  hides  and  wool,  in  large  cities,  applying  for  advances, 
generally  offer,  as  in  other  cases,  warehouse  receipts  as  security.  And 
here  again  they  will  desire  that  the  goods  shall  be  stored  in  their  own 
warehouses,  for  the  reason  that  goods  require  to  be  handled  during  the 
progress  of  warehousing.  This  may  be  conceived  of  as  an  element  of  risk, 
and  so  it  is.  Bat  it  may  be  taken  as  a  general  rule,  that  unless  a  banker 
can  trust  his  customer  so  far,  he  ought  not  to  advance  him  anything  at 
all  on  his  own  pledge. 

As  the  articles  dealt  in  by  men  in  this  trade  are  the  raw  material  of 
manufacturers,  they  come  imder  that  general  law,  applicable  to  all  such 
cases,  that  raw  materials  should  not  be  sold  on  credit.  Every  manufac- 
turer should  have  capital  (or,  at  any  rate,  credit)  enough  to  enable  him 
to  pay  cash  for  his  raw  material.  And  this  is  almost  universally  the  case. 
Canadian  dealers  export  large  quantities  of  home-grown  wool  to  manu- 
facturers in  the  United  States.  They  also  sell  to  such  manufacturers  con- 
siderable quantities  of  wools  imported  from  abroad  under  letters  of  credit. 
These  are  entered  in  American  ports.  But  it  is  a  dangerous  experiment 
to  give  time  to  manufacturers,  on  such  goods.     Though  they  may  be  re- 


1]2  BANKING    AND    COMMERCE. 

ported  in  high  credit  and  possessed  of  large  capital,  the  very  fact  of  their 
asking  credit  should  be  tlie  reason  for  refusing  it. 

Hay. 

The  growing  of  hay,  in  some  districts  of  Canada,  forms  an  important 
part  of  a  farmer's  operations.  But  the  hay  crop,  though  of  very  great 
value,  seldom  calls  for  bank  advances  to  any  extent.  Farmers  use  much 
of  it  themselves. '  A  good  part  of  the  rest  is  handled  by  small  dealers 
scattered  through  the  country  districts.  The  article  is  too  bulky  to  be 
gathered  into  warehouses;  but  considerable  quantities  are  sent  over  the 
border,  into  the  United  States.  Banking  transactions  arising  from  these 
are  almost  universally  in  the  shape  of  sight  drafts,  with  bill  of  lading 
attached.  Occasionally,  however,  when  the  hay  crop  is  a  bad  one  in  Eng- 
land, owing  either  to  rain  or  drought,  a  deiiiand  sets  in  from  that  quarter 
to  Canadian  dealers.  In  such  circumstances,  a  large  and  active  trade  has 
been  done.  It  is  a  trade  that  involves  unusual  trouble  in  handling,  and 
merchants  in  large  centres  do  not  care  to  meddle  with  it.  But  exporting, 
as  lias  been  said  already,  is  a  business  by  itself;  and  country  dealers,  in 
venturing  upon  the  export  of  hay,  have  sometimes  brought  infinite  trouble 
upon  themselves,  their  correspondents  in  Great  Britain,  and  also  upon 
London  bankers.  Although  the  difference  in  price  paid  to  the  Canadian 
farmer  and  the  price  as  quoted  in  England  is  unusually  great,  and  seems 
to  give  opportunities  for  large  profits,  tlie  multiplied  cost  of  freight  by 
land  and  water,  added  to  the  cost  of  warehousing,  wharfage,  demurrage 
and  commissions  in  England,  generally  swallows  up  this  difference.  Some- 
times, as  a  matter  of  fact,  they  do  much  more,  and  involve  the  Canadian 
shipper,  and  sometimes  his  banker,  in  heavy  losses. 

It  has  been  known  that  in  an  active  season  enormous  quantities  of 
baled  hay  have  been  lying  about  on  the  wharves  and  docks  of  England 
for  weeks  together.  The  risk  of  this,  in  that  climate,  may  be  imagined. 
It  has  also  happened  that  canal  boats  loaded  with  Canadian  hay  have 
been  held  under  demurrage  for  many  consecutive  weeks,  at  enormous 
cost,  owing  to  the  refusal  of  purchasers  to  receive  the  goods  and  accept 
bills  drawn  against  them.  In  that  case  it  has  happened  that  scores  of 
bills  have  lain  unaccepted  in  the  London  banks,  to  whom  they  were  sent 
for  collection;  and  that  the  hay,  when  brought  to  forced  sale,  did  not 
realize  a  half,  or  even  a  quarter,  of  what  was  drawn  against  it. 

It  may  be  concluded,  therefore,  that  no  Canadian  banker  will  in  future 
make  advances  to  any  country  dealer  for  the  purpose  of  buying  hay  for 
export.  And  if  bills  drawn  against  hay  shipped  across  the  Atlantic  are 
offered  him,  he  will  prefer  to  make  a  moderate  advance,  and  send  them 
on  for  collection. 

Of  all  the  various  descriptions  of  advances  referred  to  in  this  chap- 
ter, there  is  one  thing  to  be  said  that  admits  of  no  exception;  viz.,  that 
they  should  be  paid  off  at  the  end  of  every  season.  On  no  account  should 
onei  season's  advances  ever  run  into  another. 


CHAPTER   XVI. 
LOANS  TO  MANUFACTURERS  AND  IMPORTERS. 

Loans  to  Manufacturers  of  Timber,  and  Saw  ^Millers — Loans  to 
Flour  Millers — Loans  to  Cotton  and  Woolen  Manufacturers 
AND  Wholesale  Importers. 

Although  the  operation  of  cutting  down  the  forests  of  Canada 
-l\.  and  turning  the  fallen  trees  into  timber  by  hewing,  or  into  lumber 
by  sawing,  is  not  generally  called  manufacturing,  it  will  now  be 
treated  as  such,  inasmuch  as  both  are  carried  on  with  plant,  machinery 
and  tools — the  last  especially.  The  operations  of  the  timber  and  lumber 
men  of  Canada  have  been  very  diiferent  from  those  of  the  settlers  who 
cleared  the  forest  for  the  purpose  of  creating  farms.  For  in  the  latter 
case  the  trees  were  absolutely  destroyed;  in  the  former,  they  were  pre- 
served as  the  raw  material  of  manufacturing  operations.  No  lines  of 
business  have  called  for  such  heavy  advances  from  banks,  and  none  have 
given  rise  to  such  large  amounts  of  inland  and  foreign  bills  of  exchange 
as  those  now  to  be  considered. 

These  two  divisions  of  manufacture  are  so  distinct  from  one  another 
that  thev  require  separate  treatment;  the  only  point  in  which  they  coin- 
cide being  that  both  require  large  tracts  of  timbered  land,  sometimes  ex- 
tending over  thousands  of  square  miles,  from  which  to  draw  the  raw  mate- 
rial for  their  operations. 

The  first  in  order  that  will  be  taken  up  is  the  manufacture  of  square 
timber.  In  this  trade,  as  in  some  previously  mentioned,  there  are  found  in 
co-operation  two  classes  of  men,  the  one  consisting  of  small  jobbers,  and 
the  other  of  large  operators.  The  first  generally  confine  their  labors  to  a 
small  piece  of  forest  territory,  employing  a  few  hewers  and  choppers  on 
their  own  account;  having  in  view  the  delivery  of  the  product  to  some 
great  firm  at  a  central  point,  and  working  in  subordination  to  it.  These 
jobbers  are  often  half  farmers  and  half  woodsmen;  farming  in  the  sum- 
mer, and  working  in  the  woods  in  the  winter;  good  judges  of  trees  by 
long  experience,  and  generally  men  of  intelligence  and  reliability,  not 
having,  as  a  rule,  much  capital  of  their  own,  but  being  generally  safe  bor- 
rowers. Advances  to  these  men  are  of  moderate  amount;  for  no  banker 
would  listen  to  an  application  from  a  jobber  for  such  an  amount  as  would 
enable  him  to  send  the  product  to  a  distant  market,  and  compete  with  the 
larger  men  of  the  trade. 

Such  jobbers  carry  on  work  during  the  Avinter;  delivering  their  prod- 
uct and  getting  paid  for  it  in  the  spring.     Then  they  pay  off  advances. 

Sometimes,  however,  the  banking  operation  is  different.  The  large 
operator  may  have  a  suffeient  capital  to  supply  these  men  with  money  as 


114  BANKING    AND    COMMERCE. 

the  -work  goes  on.  and  also  to  supply  them  with  the  provisions  needed  in 
their  cnnips  in  the  woods.  Or  he  may  have  credit  enough  with  the  bank 
to  enable  him  to  borrow  money  for  the  purpose. 

In  this  case  he  will  enable  the  jobber  to  obtain  money  from  the  bank 
by  becoming  guarantor  for  his  advances.  These  advances  are  of  course 
paid  by  the  large  operator  when  the  lots  of  timber  made  by  the  jobber  are 
delivered.  But  a  large  operator,  in  addition  to  the  supplies  of  timber  that 
these  jobbers  may  procure  for  him,  will  generally  employ  numbers  of  men, 
scattered  over  a  wide  extent  of  territory,  to  chop,  hew,  and  haul  the  trees 
on  his  own  account.  The  operations  by  which  these  scattered  lots  of 
timber  are  floated  doAvn  subsidiary  streams  into  a  main  river  like  the 
Ottawa,  and  then  down  the  St.  Lawrence  into  the  coves  of  Quebec,  the 
great  emporium  of  the  trade,  are  well  known  in  Canada.  It  must,  how- 
ever, be  evident  that  a  large  amount  of  money  requires  to  be  disbursed  be- 
fore the  timber  can  finally  be  placed  on  board  ship,  and  foreign  bills  of 
exchange  drawn  against  it.  This  money  for  the  most  part,  from  the  very 
beginning,  has  been  obtained  by  advances  from  banks. 

An  unusually  large  capital  is  required  to  carry  on  these  operations,  for 
the  timber  growing  on  these  tracts  of  territory  must  be  owned  by  the  mer- 
chant before  a  tree  can  be  cut  down.  The  land  on  which  the  timber 
grows  is  rarely  valuable  for  settlement.  And  the  timber  merchant  does 
not  care  for  the  freehold  of  the  land  at  all.  What  he  wants  is  the  trees 
that  are  growing  upon  it. 

A  system  has  therefore  grown  up  by  which  the  right  of  cutting  trees 
over  defined  lines  of  territory  is  sold  to  operators  under  the  name  of 
limits.  These  "limits"  are  simply  licenses  to  cut,  renewable  on  payment 
of  ground  rent  year  by  year.  Yet  so  well  established  has  the  system  of 
renewal  become  that  they  are  highl}'  valuable  property,  and  constitute 
in  many  cases  a  large  part  of  the  capital  of  many  wealthy  firms. 

Before  applying  to  a  banker  for  advances  for  a  season's  operations, 
it  is  usual  for  firms  to  own  their  limits  absolutelj',  and  to  have  paid  for 
improvements  on  them,  such  as  dams,  slides  and  water-ways. 

The  operations  of  a  woodsman  require  to  be  carried  on  for  nearly 
twelve  months  before  the  timber  is  ready  for  market.  Advances  to  such 
firms  are  therefore  necessarily  as  long,  and  once  entered  upon  they  cannot 
be  stopped.  To  stop  advances  when  the  whole  floating  assets  of  a  timber 
firm  are  in  the  shape  of  half-hewn  trees  lying  scattered  over  hundreds  of 
miles  of  territory,  would  be  disastrous  on  both  sides.  Bankers,  therefore, 
are  in  the  habit  of  considering  the  situation  well  before  consenting  to 
allow  such  advances  to  begin.  And  tliis  consideration  embraces  not  only 
the  points  common  to  all  lines  of  business,  such  as  capital,  experience, 
and  reliability,  together  with  tlie  security  off'ered,  but  whether  the  bank 
can  afford  to  carrv  such  large  loans  for  so  long  a  period  at  all. 

But  when  a  banker  is  satisfied  that  he  can  afl^ord  to  make  advances  for 
so  long  a  period,  he  will  consider  whether  the  amount  desired  is  reason- 
able in  proportion  to  his  customer's  capital,  and  the  extent  of  the  year's 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.   115 

operations.  Every  timber  maker  lays  out  his  plans  a  year  beforehand,  to 
get  out,  as  it  is  called,  a  certain  quantity.  Upon  this  is  based  the  number 
of  men  and  horses  sent  into  the  woods,  and  the  supplies  of  food  and  fod- 
der provided.  The  number  of  sleighs,  wagons,  canoes  and  other  requisites 
needs  to  be  carefully  calculated ;  in  fact,  the  winter's  operations  of  a 
timber-maker  in  the  woods  arc  of  the  nature  of  an  expedition.  For  once 
dispersed  amongst  their  cam])s  in  the  forest,  there  they  must  remain  until 
the  spring. 

The  timber-maker  will  inform  liis  banker  what  he  intends  to  do;  and 
the  banker  will  doubtless  have  learned  enough  to  estimate  how  much 
money  will  be  required  to  carry  him  through.  It  may  be  taken  for  grant- 
ed tliat  the  borrower  understands  the  trade,  for  no  man  could  carry  it  on 
for  a  month  unless  he  did. 

Character  and  reliability  will  be  considered  as  usual.  But  in  the 
matter  of  capital  wide  differences  will  be  found.  Some  of  the  wealthiest 
firms  that  Canada  has  known  have  been  able  to  carry  on  the  operations 
of  a  whole  season  involving  immense  disbursements  without  borrowing 
at  all. 

But  at  the  otlicr  end  of  the  scale  are  men  of  capacity  and  character 
who  have  barely  ca})ital  enough  to  own  their  limits.  This,  however,  is  a 
minimum  requirement.  To  make  advances  to  a  timber-maker  while  some- 
one else  has  a  claim  on  his  limits  is  a  very  rash  proceeding,  and  has  led, 
during  bad  seasons,  to  heavy  bank  losses.  A  banker,  under  all  circum- 
stances, will  aim  to  be  the  first  claimant;  never  the  second. 

Limits  can  be  'assigned  to  a  bank  as  security,  as  they  are  not  real 
estate.  They  generally  are  so  assigned.  And  very  good  security  they 
generally  prove,  if  valued  with  reasonable  care. 

Risks  to  Bu  Taken  into  Account. 

But  in  addition  to  limits,  tlie  pieces  of  timber  themselves  can  be  as- 
signed, and  sjDCcial  legislation  has  been  devised  for  the  purpose.  They 
are  always  stamped  with  a  registered  mark,  and  occasionally  a  bank  will 
have  them  marked  on  its  own  account.  It  is,  however,  almost  unheard  of 
that  a  bank  should  lose  its  hold  upon  the  timber,  or  fail  to  receive  the  pro- 
ceeds when  sold.  The  risks  lie  in  another  direction,  viz.,  that  the  pieces 
shall  stick  fast  in  subordinate  streams,  or  be  carried  away  by  floods  on  the 
larger  ones,  both  involving  the  danger  that  many  of  them  will  never  be 
recovered,  or  that  the  expense  of  recovering  them  will  destroy  the  chance 
of  profit.  There  is  also  the  risk  of  a  fall  in  the  British  market  during 
the  long  ])eriod  of  work  in  the  woods  and  of  driving  to  Quebec.  A  drop 
in  the  ])rice  has  been  known  of  so  serious  a  character  as  not  only  to 
destroy  the  chance  of  profit,  but  the  possibility  of  realizing  ain'thing  near 
even  the  cost  of  the  article.  Hence  it  is  that  bankers  require  to  be  satis- 
fied beforehand  of  the  ability  of  their  customer  to  bear  such  reverses. 

In  this  branch  of  trade  there  is  usually  a  distinct  line  of  demarcation 
between  the  producer  and  the  exporting  merchant.     The  producer  rarely 


116  BANKING    AND    COMMERCE. 

exports  his  product ;  in  fact,  wlien  lie  does  so.  the  result  is  not  always 
satisfactory.  And  the  banker  has  something  to  say  to  this  also;  he  has 
carried  the  risks  of  the  producer's  operations  for  twelve  months,  and  it  is 
time  that  they  should  end.  For  undoubtedly  a  new  line  of  risks  begins 
when  timber  is  shipped  across  the  ocean.  To  whatever  market  destined, 
whether  to  Great  Britain,  or  to  the  Continent  of  Europe,  or  any  other 
market,  the  trade  assumes  an  entirely  new  aspect  when  once  the  timber 
is  placed  on  board  ship  for  transport  across  the  sea.  Before  that  is  done, 
the  man  who  has  produced  it  and  carried  it  through  all  risks  of  navigation 
to  a  seaport  has  a  right  to  be  paid  for  it,  and  thus  have  the  means  of 
recouping  his  banker. 

With  respect  to  bills  arising  out  of  the  export  of  timber  a  practice 
has  grown  up  which  is  peculiar  to  this  trade.  Every  timber  house  in 
Canada  has  usually  some  corresponding  house  in  Great  Britain  on  whom 
it  draws  Sometimes  these  houses  are  merchants  of  large  capital  in  the 
seaports  of  Great  Britain.  Sometimes  they  are  branches  of  the  Canadian 
house,  sometimes  they  are  London  bankers.  To  these  correspondents 
the  bills  of  lading  are  remitted;  but  the  bills  of  exchange  are  drawn 
without  reference  to  them.  When  such  bills  were  accepted  by  a  different 
corresponding  house,  they  could  stand  on  the  merits  of  both  drawer  and 
drawee.  But  when  the  corresponding  house  was  a  branch  of  the  other, 
the  bills  stood  upon  the  merit  of  the  drawer  alone.  In  this  case,  it  was 
for  the  banker  to  have  thorough  and  up-to-date  information  of  what  the 
two  branches  of  the  house  were  doing.  Casualties  in  this  line  of  business, 
however,  have  not  beer  frequent.  Only  seldom  in  a  quarter  of  a  century 
has  there  occurred  a  failure  on  this  side  the  Atlantic,  and  rarely  indeed  on 
the  other,  unless  the  English  merchant  had  engaged  in  speculations  for- 
eign to  his  business. 

.Saw  Milling. 

Though  the  operations  of  the  timber  merchant  and  saw  miller  both 
commence  by  hewing  down  tlie  trees  of  the  forest,  there  is  a  marked  dif- 
ference in  subsequent  developments.  The  squaring  of  trees  in  the  woods 
is  a  simple  process,  after  which  they  only  require  transportation  to  mar- 
ket. But  lumber  and  deals,  in  addition,  need  for  their  production  an 
elaborate  manufacturing  process,  carried  on  in  expensive  mills,  filled  with 
costly  ])lant  and  machinery. 

But  larger  and  finer  trees  are  required  for  timber  than  for  the  others. 
There  is  a  difference  also  in  several  respects  between  the  manufacture  of 
deals  and  lumber,  the  principal  being  that  they  ai'e  intended  for  different 
markets. 

Deals  are  wholly  exjiorted  to  Europe,  while  lumber  is  manufactured 
for  the  Canadian  and  L'nited  States  market.  Deals  are  much  finer  and 
more  costly  articles  tlian  lumber,  requiring  finer  logs  for  the  raw  material 
and  a  more  valuable  kind  of  trees.  Deals,  moreover,  are  cut  in  pieces  of 
three  inches  in  tliickuess.  wliile  the  standard  thickness  of  lumber  is  one 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.   117 

inch.  Thus  it  conies  about  that  on  a  given  range  of  forest  territory,  tlm 
selection  is  made  of  the  finest  trees  for  timber,  of  trees  of  the  second 
quality  for  deals,  and  of  tlie  third  for  sawed  lumber. 

But  of  all  these  three  there  are  many  varieties,  involving  great  differ- 
ences in  value.  Only  a  practised  expert  can  judge  rightly  of  such  dif- 
ferences, and  it  is  largely  in  the  knowledge  of  what  will  be  the  best  use 
to  make  of  certain  trees,  so  as  to  get  the  best  possible  value  out  of  them, 
that  a  successful  carrying  on  of  the  business  of  a  lumberman  depends. 

With  regard  to  the  mill  itself,  where  the  operation  of  manufacturing 
is  carried  on,  great  and  irretrievable  mistakes  have  at  times  been  made, 
occasioning  ruin  to  the  operator  and  loss  to  his  banker. 

A  mill  may  be  built  in  the  wrong  place,  as  respects  water  power,  con- 
venience of  receiving  logs,  or  shipping  lumber,  or  it  may  be  built  in  too 
expensive  a  fashion  for  the  work  it  has  to  do,  or  it  may  be  fitted  up  with 
inferior  plant  and  machinery.  Hence  the  importance  of  a  saAV  miller  hav- 
ing a  practical  knowledge  of  machinery  and  also  the  faculty  of  using  it 
profitably,  as  has  already  been  shown.  From  all  these  considerations  it 
will  be  evident  that  more  capital  is  required  in  the  saw  milling  business 
than  in  that  of  the  making  of  timber;  practically  just  so  much  more  as 
is  required  to  build  and  equip  the  mill  and  the  adjoining  storage  grounds. 
In  nearly  all  other  respects  the  conditions  are  the  same. 

Mills  Should  Not  Be  Encumbered. 

Now,  when  a  banker  comes  to  deal  with  the  account  of  a  saw  miller 
it  is  obvious  that  tlie  first  condition  is  that  the  fixed  property  shall  have 
been  paid  for,  both  the  mill,  and  the  timber  limits.  But  if  an  exception 
may  be  made  in  either  case,  it  should  certainly  not  be  in  favor  of  the 
mill.  A  lumberer  whose  saw  mill  is  not  free  from  incumbrance  is  not  in 
a  position  to  ask  advances  from  a  bank.  Limits  are,  as  a  rule,  much 
more  salable  than  saw  mills;  and,  moreover,  a  bank  can  take  security  on 
them  at  any  time. 

But  now,  supposing  this  preliminary  to  be  as  it  should  be,  the  saw 
miller  desiring  advances  will  state  the  quantity  of  lumber  he  is  proposing 
to  manufacture  for  the  season.  If  the  trade  is  brisk,  demand  strong,  and 
profit  good,  he  may  determine  to  run  his  mill  to  its  utmost  capacity,  and 
work  it  night  and  day.  If  the  trade  is  dull  and  demand  slack,  he  will  no 
doubt  be  wise  enough  to  run  his  machinery  moderately.  The  banker  (or 
his  board  of  directors)  will  doubtless  know  sufficient  of  the  conditions  of 
the  trade  to  judge  which  of  the  two  courses  is  more  prudent,  and  regulate 
advances  accordingly. 

The  security  taken  will  probably  be  the  same  as  in  the  timber  trade; 
namely,  a  transfer  of  the  limits  and  a  pledge  of  the  logs  and  their 
product. 

In  this  trade,  unlike  that  in  timber,  the  banker  requires  to  look  nar- 
rowly after  insurance.  In  the  square  timber  trade  no  insurance  is  ever 
required,  for  the  article  is  never  out  of  the  water.     But  saw  mills  and  lum- 


118  BANKING    AND    COMMERCE. 

ber  are  terribly  inflammable  articles,  and  in  a  large  concern  insurance  to 
the  amount  of  lumdreds  of  thousands  may  be  necessary  to  safety. 

All  advances  to  lumberers  and  timber-makers  should  be  made  gradu- 
ally, as  the  season  advances,  and  as  more  and  more  money  requires  to  be 
spent  on  the  article  to  bring  it. to  a  salable  condition.  If  they  are  asked 
for  otherwise,  there  is  reasonable  suspicion  that  they  may  be  used  to  pay 
antecedent  debts. 

When  the  lumberman's  stock  is  in  a  finished  condition,  a  distinction 
arises  between  its  two  varieties,  viz.,  lumber  and  deals.  The  saw  miller 
sells  his  deals  for  export  to  Europe.  They  go,  therefore,  to  an  Atlantic 
seaport,  and,  as  a  rule,  they  are  purchased  by  a  merchant  of  the  port.  It 
has  been  customary  for  such  merchants  to  give  their  acceptances  in  pay- 
ment to  the  manufacturer;  but,  considering  the  very  large  sums  such  ac- 
ceptances amount  to,  it  has  been  common  for  a  lien  on  the  property  to  be 
held  by  the  seller  or  his  banker  until  the  acceptances  were  paid. 

The  manufacturer  of  sawed  lumber,  as  distinguished  from  deals,  has 
always  found  his  principal  market  in  the  United  States.  It  is  here  per- 
haps more  than  in  any  other  product  that  the  interdependence  of  the  two 
countries  has  been  manifest.  Canada  in  proportion  to  her  population  has 
always  had  far  more  forest  area  than  the  adjacent  States;  hence  it  came 
about  naturally  that  the  lumber  mercliants  of  the  latter,  from  an  early 
period,  looked  to  Canada  as  a  market  of  supply.  In  many  cases  they 
formed  permanent  connections  with  the  saw  millers  of  the  North,  making 
arrangements,  not  seldom,  to  buy  the  whole  product  of  certain  mills  at  a 
schedule  of  prices  agreed  upon.  Bankers  therefore  who  kept  the  accounts 
of  saw  millers,  would  have  the  acceptances  of  such  houses  offered  for  dis- 
count and  naturally  became  interested  in  their  means  and  standing.  For 
the  discount  had  to  rest  on  the  credit  of  the  parties  to  the  paper,  inas- 
much as  it  was  impossible  for  a  Canadian  banker  to  maintain  a  lien  upon 
an  article  like  lumber  after  it  had  passed  beyond  the  borders  of  his  own 
country. 

The  lumber  trade  of  the  Northern  States,  with  a  few  striking  excep- 
tions (one  of  them  hereafter  noticed),  has  for  a  long  period  been  in  the 
hands  of  firms  of  tried  chamcter  and  sufficient  means,  not  to  speak  of 
others  of  large  wealth.  This  class  of  discounts  has  been  subject  to  few 
casualties  and  has  always  been  looked  on  with  favor.  One  reason  for  this 
is  that  there  is  no  speculative  element  in  the  trade,  though  it  is  subject 
to  cycles  of  good  and  bad  years,  generally  about  five.  The  changes,  how- 
ever, either  in  the  way  of  improvement  or  deterioration,  proceed  slowly, 
and  there  is  ample  time  for  operators  to  prepare  for  changes,  either  by 
curtailment  of  business  or  enlargement,  as  circumstances  call  for  it. 

The  bad  years  in  the  trade  are  generally  extremely  trying,  involving 
not  only  the  doing  of  business  without  profit,  but  the  carrying  it  on  at  a 
loss  for  years  together. 

Yet  the  business  has  wonderful  recuperative  powers.  At  the  end  of  a 
cycle  of  bad  years  it  sometimes  appears  to  be  so  prostrate  as  to  be  incapa- 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.  119 

ble  of  revival.  Not  onh^  the  lumber  itself,  but  all  tliat  goes  to  ])roduce  it, 
seems  to  have  lost  its  value.  ISIills  and  limits,  but  especially  the  latter, 
become  such  a  drug  in  the  market  as  to  become  practically  worthless.  Such 
times  as  these  try  the  faith  and  courage  of  a  banker  sorely.  But  if  he  is 
unwise  enough  to  bring  a  customer's  account  to  a  close  at  such  a  time,  and 
sell  his  property  at  a  price  which  results  in  a  heavy  bad  debt,  he  is  not 
unlikely  to  hear  later  on  that  the  same  property  had  been  resold  at  a  price 
which  would  have  enabled  his  customer  to  pay  liis  debts  in  full  with  the 
addition  of  several  years  of  interest. 

Few  bankers  in  Canada  but  have  known  cases  of  tliis  kind,  and  some 
have  seen  such  extraordinary  cases  as  the  realizing,  after  a  lapse  of 
years,  for  one-tenth  part  of  a  certain  area  of  timbered  lands  a  greater 
price  than  the  whole  was  once  in  danger  of  being  sacrificed  for  in  a  time 
of   depression. 

There  is  one  feature  of  this  trade  in  which  it  differs  from  almost 
every  other  in  Canada,  viz.,  that  many  Americans  have  crossed  the  border 
at  various  times  and  established  mills  on  their  own  account.  Not  a  few  of 
such  have  become  permanent  citizens  of  the  country,  transferring  to  it 
not  only  capital,  but  themselves  and  all  their  interests.  Some  of  the 
largest  of  the  lumber  firms  now  in  Canada  are  of  this  description;  hav- 
ing acquired  limits,  built  mills,  and  amassed  wealth;  becoming,  it  scarce 
needs  be  said,  most  valuable  citizens  and  satisfactory  customers  to  the 
banks.  Natural  it  was  for  houses  of  this  description  to  keep  up  close 
connections  with  lumber  merchants  in  American  cities;  using  them  as 
agents  or  consignees.  Such  American  houses  would,  not  seldom,  accept  for 
the  Canadian  house  in  advance  of  shipment.  In  that  case  the  banker 
would  be  advised  of  the  fact,  and  use  his  judgment  as  to  discounting  the 
bills.  If  he  did,  he  would  take  care  that  his  own  advances  should  be  paid 
ofl'  before  they  matured,  or  that  the  proceeds  of  the  bills  should  be  used 
to  take  them  up. 

The  position  which  has  resulted  during  recent  years  in  the  lumber 
trade  from  the  strife  of  parties  in  politics  in  the  United  States  and  in  Can- 
ada, has  had  the  result  of  inducing  not  a  few  firms  in  the  lumber  regions 
of  the  States  to  acquire  properties  in  Canada,  and  carry  on  their  operations 
here.  As  the  forests  of  the  Northern  States  become  more  and  more  de- 
pleted, this  step  is  likely  to  become  more  frequent.  All  that  has  been  ob- 
served with  regard  to  the  migration  in  the  earlier  years  in  the  trade  applies 
in  the  fullest  measure  to  this. 

The  only  other  variety  of  banking  transactions  connected  with  this 
trade  is  in  the  case  of  American  houses  of  such  Avealth  and  capital  that 
they  can  carry  on  the  large  operations  connected  with  a  Canadian  branch 
of  their  business,  without  requiring  bank  advances  at  all. 

In  this  case  all  that  a  Canadian  banker  will  be  required  to  do  is  to 
give  cash  for  authorized  short  date  drafts  upon  the  parent  firm.  But 
here  an  observation  requires  to  be  made.  In  cases  of  this  kind  it  has 
sometimes  occurred  that  a  change  of  policy,  or  a  change  of  times,  brought 


120  BANKING    AND    COMMERCE. 

about  a  clifFerent  style  of  dealing  with  Canadian  banks,  and  that  the  cash- 
ing of  sight  drafts  drifted  into  the  making  of  permanent  advances.  An 
occurrence  like  this  is  fully  opened  up  later  on. 

On  the  whole  the  accounts  of  persons  in  this  trade,  while  in  many 
respects  the  most  advantageous  that  a  banker  can  carry  on,  are,  at  the 
same  time,  such  as  to  require  more  technical  knowledge  and  more  good 
judgment,  more  foresight,  and,  in  difficult  times,  more  courage  and  pa- 
tience, than  any  other  class  of  business  that  may  be  submitted  to  him. 

Advances  to  Flovr  Millers. 

Tliis  branch  of  manufacture  differs  from  almost  every  other  in  the 
fact  that  the  raw  material  is  of  a  highly  speculative  character. 

The  Produce  Exchanges  of  Chicago,  New  York,  and  Montreal,  on  this 
side  of  the  Atlantic ;  and  of  London,  Liverpool,  and  Glasgow  on  the  other 
(not  to  speak  of  Continental  cities),  are  all  the  scene  of  transactions  in 
grain  to  enormous  amounts  by  persons  who  never  either  see  or  handle 
the  commodity,  whose  operations  have  a  constant  bearing  upon  prices. 

This  has  already  been  fully  considered  under  the  heading  of  "Ad- 
vances to  Men  in  the  Grain  Trade."  What  we  are  now  concerned  with 
are  the  operations  of  the  men  who  turn  the  grain  into  flour,  oatmeal,  or 
other  manufactured  products. 

Of  these  there  were  formerly  a  large  number  scattered  over  the  grain- 
producing  countries  of  both  Canada  and  the  United  States,  utilizing  the 
numerous  water  powers  to  be  found  therein.  Their  little  establishments 
in  some  cases  would  grow  with  the  growth  of  the  town  or  district,  until 
they  became  of  sufficient  importance,  not  only  to  supply  the  country 
around  them,  but  some  distributing  centre,  whence  it  might  be  shipped 
across  the  Atlantic.  In  the  early  days  of  this  trade  the  miller  almost 
invariably  sent  his  product  for  sale  on  consignment;  drawing  against  it 
for  a  portion  of  its  value,  with  the  usual  result,  at  length,  of  embarrass- 
ment on  both  sides.  As  matters  progressed,  consignments  gradually  gave 
place  to  purchase  and  sale;  and  this  was  carried  out,  not  only  with  ship- 
ments to  centres  in  Canada,  but  also  to  exports  across  the  ocean.  As  time 
progressed  and  population  increased,  the  mills  situated  along  the  line  of 
water  powers  were  enlarged  in  capacity,  and  steam  called  into  aid,  until, 
in  some  centres,  large  establishments  were  to  be  found,  whose  brand 
became  well  known,  not  only  in  every  part  of  this  country,  but  also  in 
the  centres  of  population  in  Europe. 

In  dealing  with  the  men  carrying  on  this  business  the  banker  will  re- 
quire the  same  fundamental  conditions  as  to  full  ownership  of  property, 
capacity,  experience,  and  prudence  which  have  been  referred  to  already. 
But  as  every  trade  has  its  special  requirements  and  dangers,  the  banker, 
in  making  advances  to  a  flour  miller,  will  take  care  to  limit  them  to  such 
an  amount  that  his  funds  cannot  be  used  for  speculative  holdings. 

If  the  miller  carries   on  his   trade  steadily,  and  sells   as   fast  as  he 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.  121 

produces,  advances  will  never  need  to  be  more,  as  a  rule,  than  will  buy- 
about  a  month's  supply  of  grain. 

There  is  no  branch  of  manufacture  which  is  so  simple  in  character, 
which  takes  so  little  time,  and  which  adds  so  little  to  the  cost  of  the  arti- 
cle as  millina;.  A  flour  miller  is  not  like  a  lumberman  whose  article  takes 
twelve  months  to  produce,  nor  a  tanner  or  pork  packer  whose  process 
requires  weeks  or  months  to  complete,  nor  a  cheese-maker  whose  product, 
when  made,  requires  time  to  ripen.  The  product  of  a  flour  miller  can 
always  be  sold.  The  world  needs  and  buys  it  every  day,  so  that  the 
process  of  manufacturing  could  go  on,  if  circumstances  required  it,  with- 
out any  accumulation  of  stock  whatever. 

Some  time,  however,  may  reasonably  be  allowed  for  contingencies, 
both  for  obtaining  a  supply  of  grain,  and  of  manufacturing,  barrtlling, 
sacking,  and  transporting  to  market. 

If  the  advances  exceed  the  amount  required  to  purchase  a  month's  sup- 
ply of  raw  material,  the  banker  will  need  to  be  satisfied  that  the  condition 
of  the  market,  the  difficulty  of  transport,  the  blocking  of  supplies,  or 
other  causes,  may  account  for  the  excess. 

In  a  miller's  account,  as  well  as  a  grain  merchant's,  any  indication  of 
speculating  on  margin  will  need  to  be  carefully  watched  and  checked  at 
the  ver}'  outset. 

The  banker  will  also  be  careful  that  his  advances  are  not  expended  in 
additions  and  improvements  to  the  mill;  or  in  the  purchase  of  an  addi- 
tional one,  should  some  tempting  offer  be  made.  A  man  who  desires  to 
stand  well  with  his  banker  will  never  be  tempted  to  such  a  misuse  of  funds 
advanced  to  him. 

This  trade,  unlike  that  of  timber  and  lumber,  does  not  move  in  cycles 
of  alternate  prosperity  and  depression.  It  has  its  changes,  nevertheless, 
but  they  are  of  a  rnore  transient  character.  The  market  is  ebbing  and 
flowing  continually ;  and  there  is  a  necessity  for  the  miller,  like  the  grain 
dealer,  to  keep  a  daily  and  hourly  watch  upon  it. 

It  scarcely  needs  to  be  added  that  every  miller  will  act  wisely  in  en- 
deavoring to  make  specialties,  which  will  practically  sell  themselves  at 
better  prices  than  an  article  which  has  no  name,  however  it  may  be  pushed. 
To  do  this,  he  will,  of  course,  be  rigidly  careful  in  selecting  his  grain, 
have  his  machinery  up-to-date,  and  work  his  process  at  every  step  to  the 
desired  end.  And  men  of  small  capital  in  this  business,  perhaps  more 
than  any  other,  need  to  beware  of  launching  into  operations  larger  than 
their  capacity  or  capital  justify.  It  is  so  easy  to  do  it;  easier  in  this  trade 
than  any  other  that  can  be  named.  But  in  no  trade  is  there  more  reason 
for  the  observance  of  the  old  adage, 

"Vessels  large  may  venture  more. 

But  little  boats  should  keep  near  shore." 

The  principles  laid  down  so  far  will  equally  apply  to  such  manufac- 
turers as  tanners,  distillers,  sugar  refiners,  and  others  of  a  like  character, 


122  BANKING    AND    COMMERCE. 

where  larger  capital  in  buildings  and  plant  is  necessary,  but  where  there 
is  not  a  large  proportionate  employment  of  labor. 

In  all  these  there  is  required  to  ensure  success  a  well  chosen  site,  mod- 
ern buildings  and  plant,  adequate  capital,  thorough  knowledge  of  mar- 
kets, and  if  possible  a  special  article  with  a  well-known  name  and  mark. 
And  the  banker  who  is  applied  to  for  advances  (or  for  foreign  credits 
under  which  he  may  be  requested  to  surrender  documents)  will  look  care- 
full  v  into  all  these  points,  so  as  to  judge  whether  advances  asked  are  of 
reasonable  amount,  and  also  whether,  from  the  "working  of  the  account," 
if  he  has  had  it  before,  the  business  appears  to  have  been  carried  on  pros- 
perously or  not.  This  Avill  stand  him  in  special  stead  in  times  of  de- 
pression, when  it  seems  impossible  to  make  profits  in  any  line  of  business, 
and  when  that  most  difficult  alternative  is  presented,  bet^veen  making  fur- 
ther advances  and  keeping  a  concern  alive,  or  stopping  advances  alto- 
gether, with  a  certainty  of  bringing  it  to  an  end.  In  the  former  case, 
there  is  risk  of  increasing  what  may  be  a  possible  loss,  tempered  with  an 
expectation  of  assisting  a  worthy  customer  over  a  difficult  time,  and 
avoiding  a  loss  altogether.  In  the  latter  case  there  will  be  an  absolute 
certainty  of  loss,  with  the  wearing  vexation  of  handling  an  insolvent 
estate,  realizing  stocks  of  merchandise  (perhaps  shipping  them  to  distant 
markets,  and  waiting  anxiously  for  returns),  selling,  or  attempting  to  sell, 
mills,  factories,  lands,  or  ships;  processes  which  every  banker  of  experi- 
ence has  learned  to  dread  as  not  only  vexing  to  the  last  degree,  but  as 
almost  invariably  disappointing. 

In  such  circumstances  nothing  enables  a  banker  to  come  to  a  sound 
decision  better  than  a  knowledge,  not  only  of  the  customer  himself  (which 
is  the  first  element),  but  a  general  knowledge  of  the  business  he  is 
carrying  on. 

Cotton   and  Woolen  Mills,  Etc. 

There  are,  however,  manufacturers  of  an  entirely  different  description 
to  the  foregoing.  In  fact,  these  are  seldom  spoken  of  as  manufacturers 
at  all. 

But  we  now  have  in  Canada  large  developments  of  manufacturing  in- 
terests, such  as  were  formerly  confined  to  England  and  the  older  countries 
of  Europe,  and  which  crossed  the  Atlantic,  and  became  established  in  New 
England  and  other  parts  of  the  United  States  at  an  earlier  period  than  in 
Canada.  These  last  have  been  largely,  but  not  wholly,  the  gro^vth  of  a 
protective  policy. 

It  is  not  the  intention  of  this  work  to  discuss  the  debated  question  of 
Free  Trade  vs.  Protection.  The  fact  is  simply  noted  that  there  are  now 
established  in  Canada,  as  developed  by  what  is  known  as  the  "National 
Policv,"  cotton  factories,  woolen  mills,  iron-works,  and  many  other  manu- 
facturing industries,  with  respect  to  all  of  which  one  particular  point  of 
difference  from  the  former  ones  is  noticeable,  viz.,  the  large  amount  of 
mechanical  labor  that  is  required  to  carry  them  on.     To  produce  the  same 


finnuf 


T.OAXS   TO   MAXUI  ACTURERS   AND    IMPORTERS.     123 

ml  output  of  goods  iu  a  cotton  factory  that  would  be  turned  out  of  a 
flour  mill,  for  example,  ten  or  even  twenty  times  the  number  of  artisans 
would  be  required.  And  the  outlay  for  wages  would  be  large,  in  a  corre- 
sponding degree.  Some  of  this  class  of  manufactures  are  more  indigenous 
to  the  soil  tiian  others;  for  example,  woolen  mills  more  than  cotton  mills; 
inasmuch  as  part  of  the  raw  material  of  a  woolen  mill  is  a  product  of 
the  country.  Woolen  mills  were  therefore  known  in  Canada  long  before 
cotton  mills  were  heard  of.  Such  mills,  however,  were  of  a  very  simple 
type,  and  corresponded  largely  to  the  grist  mills  of  primitive  days.  These 
woolen  mills,  however,  have  now  developed,  in  many  cases,  into  large 
establi-shments  in  which  goods  are  produced  of  a  quality  rivaling  those 
of  the  old  world.  The  same  process  of  development  has  been  seen  in 
manufactures  of  iron,  steel  and  agricultural  implements.  The  blacksmith 
shops  have  grown  with  the  growth  of  the  locality.  A  ]:>rimitive  village 
has  become  a  busy  town  or  city,  and  the  blacksmith  of  former  days  has 
expanded  into  a  manufacturer  of  all  kinds  of  goods  in  iron  and  steel, 
including  machines  for  producing  other  things.  Similarly  the  wagon 
maker  and  mechanic  of  a  former  generation  is  now  the  head  of  a  vast 
establishment  employing  thousands  of  hands,  and  manufacturing  agri- 
cultural machines,  not  only  for  the  Canadian  farmer,  but  for  export  to 
distant  colonies  of  the  Empire  and  other  countries.  The  little  cabinet 
maker's  shop  has  grown  into  a  vast  furniture  factory  able  to  produce 
goods  that  can  be  exported  to  advantage  to  the  mother  country. 

This  process  of  development  is  constantly  widening,  and  embracing 
other  articles,  otlier  lines,  and  still  wider  areas  of  production. 

All  this  must  come  under  the  cognizance  of  the  banker ;  and  the  enter- 
prising men  who  have  developed  these  industries  will  certainly  seek  to  be 
his  customers,  and  need  his  facilities,  not  only  to  give  cash  for  the  bills 
of  their  customers,  but  in  the  way  of  direct  loans. 

With  respect  to  these  lines  of  manufacture,  as  has  been  observed  re- 
specting others,  the  first  and  fundamental  requirement  of  a  sound  busi- 
ness concern  is,  that  if  the  customer  owns  the  property  it  shall  not  be 
encumbered;  and,  second,  that  whatever  advances  are  obtained  shall  be 
represented  by  merchandise  which  has  been  paid  foi:,  or  collectible  debts. 
In  entering  on  the  business  of  dealing  with  manufacturers,  the  banker 
will  soon  ascertain  that  there  are  great  differences  between  the  skill  and 
capacity  of  one  manufacturer  and  another.  Even  when  business  is  gen- 
erally prosperous,  one  man  may  succeed  and  another  fail.  Of  several  men 
who  are  carrying  on  cotton  mills,  one  may  have  a  sounder  judgment 
of  raw  cotton  than  another,  as  well  as  of  the  best  time  and  place  for 
purchasing  the  quantity  needed  from  time  to  time,  and  of  the  best  mode 
of  utili;dng  machinery.  A  whole  season's  productions  may  be  damaged 
by  errors  in  this  respect.  Men  in  the  charge  of  woolen  mills  may  also  pro- 
duce goods  of  a  pattern  that  will  not  sell,  or  they  may  acquire  a  name 
for  a  badly  made  goods  owing  to  poor  machinery. 

An  agricultural  implement  maker  may  experiment  upon  new  styles  of 


124  BANKING    AND    COMMERCE. 

machines;  which  styles  may  he  unsuccessful^  and  have,  practically,  to  be 
given  away.  It  is  not,  therefore,  enough  that  a  banker's  advances  should 
rest  on  merchandise  as  a  matter  of  theory;  for  if  they  are  employed  to 
purchase  poor  raw  material,  or  to  produce  merchandise  that  nobody  wants, 
his  reliance  on  merchandise  may  prove  a  delusion.  Such  things  seldom 
happen  to  an  extent  which  makes  banking  advances  absolutely  unsafe. 
But  they  have  transpired  in  the  experience  of  bankers,  both  here  and 
abroad,  and  they  manifest  themselves  in  the  inability  of  the  borrower  to 
repay,  or  reduce  advances  as  agreed  upon.  And  they  often  result  in  the 
batiker  having  to  take  security  upon  property  for  the  unpaid  portion 
of  the  debt. 

And  here  it  is  that  one  of  the  dangers  of  incautious  banking  arises. 
If  a  borrower  has  been  able  to  obtain  advances  from  a  bank,  while  his 
property  is  mortgaged,  the  banker  will  have  no  recourse  but  to  take  a 
second  mortgage  as  security.  Now,  second  mortgages,  of  all  forms  of 
security,  are  the  most  undesirable  and  delusive;  for  in  a  majority  of 
cases  the  banker  will  find  that  his  customer  has  already  obtained  on  the 
property  such  an  amount  as  makes  it  impossible  for  anything  additional 
to  be  got  out  of  it. 

But  the  greatest  danger  in  carrying  a  manufacturer's  account  is  that 
the  funds  loaned  for  the  purpose  of  producing  merchandise  may  be  di- 
verted in  the  direction  of  fixed  property.  A  manufacturing  establishment 
is  subject  to  constant  requirements  for  repairs,  improvements,  or  addi- 
tions, either  to  the  building,  the  machinery  or  the  power.  Circumstances 
often  transpire  that  seem  to  call  for  xmusual  outlay;  some  accident  to 
machinery;  some  bursting  of  a  dam;  some  fire  not  wholly  covered  by 
insurance;  all  of  which  call  for  expenditure  that  cannot  be  met  out  of 
profits.  Or  the  manufacturer  may  be  of  a  quick,  inventive  capacity;  fond 
of  trying  experiments  calling  for  new  machines  or  additions  to  build- 
ings. 

In  all  these  cases  such  expenditures  should  be  met  out  of  a  reserve 
fund  invested  in  a  realizable  form,  or  out  of  additional  capital,  or  an 
issue  of  bonds.  But  in  some  cases  they  become  a  drain  upon  banking 
advances,  and  cause  suoh  advances  to  assume  the  shape  of  a  "lock  up." 
In  this  manner  many  of  the  losses  in  the  manufacturing  districts  both  of 
England  and  Canada  occurred.  Indeed,  to  such  an  extent  has  this  been 
the  case  at  times,  that  a  manufacturing  concern  has  drifted  from  bad  to 
worse,  until  bank  advances  were  represented  by  nothing  but  buildings 
and  machinery,  which  when  realized  left  a  debt  behind,  on  which  the 
banker  might  receive  a  dividend  of  five  cents  on  the  dollar.  These  are 
not  fancies,  but  facts.''* 

44  In  one  of  the  largest  manufacturing  districts  of  England  a  bank  has  long 
carried  on  business  ■which  had  almost  the  whole  of  its  resources  employed  in  man- 
ufacturing accounts.  Two  principles  have  been  rigidly  observed  in  the  manage- 
ment of  this  bank  from  the  beginning,  viz.,  that  advances  shall  never  exceed 
more  than  one-tenth  of  the  annual  output  of  the  concern;  and  that  all  such  ad- 
vances shall  be  paid  off  once  a  year.  (This,  of  course,  does  not  refer  to  the  dis- 
count of  trade  bills.)     This  bank  has  had  a  career  of  singular  prosperity  amongst 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.  125 

Loans  to  Wholesaie  ^Merchants. 

There  is  this  fundamental  difference  between  the  wholesale  merchant 
and  the  manufacturer;  that  the  merchant,  if  his  credit  is  good  enough, 
can  put  the  whole  of  his  stock  upon  his  shelves  without  the  expenditure  of 
a  single  dollar  except  for  freight  and  duties.  Good  credit  will  enable 
liim  to  obtain  all  he  wants  from  manufacturers  on  this  side  of  the  Atlantic, 
or  from  wholesale  houses  in  England.  But  a  manufacturer  can  do  noth- 
ing of  the  kind.  From  the  time  that  he  begins  operations  he  has  to  pro- 
vide for  a  cash  expenditure  which  never  ceases  until  goods  are  ready  for 
sale.  In  nearly  every  branch  of  manufacture  he  must  pay  cash  for  his 
raw  material  and  his  fuel.  And  the  moment  he  begins  the  manufactur- 
ing process,  his  pay-roll  of  wages  confronts  him  week  by  week,  and  must 
be  met.  There  can  be  no  possibility  of  asking  credit  here;  not  for  a 
single  week  could  wages  be  left  unpaid.  In  the  case  of  the  special  lines 
of  manufacture  lately  under  review,  where  wages  are  a  most  important 
item  of  cost,  the  necessity  of  meeting  the  large  sums  required  is  the  most 
harassing  of  all  financial  pressures.  It  presses  indeed  more  heavily  than 
the  necessity  of  ineeting  acceptances  and  promissory  notes,  for  the  payees 
of  these  can  be  approached  for  renewal  at  a  pinch,  while  a  request  to  a 
body  of  workmen  to  defer  payment  of  wages  is  utterly  impossible.  And 
as  payment  is  imperative,  the  manufacturer  will  naturally,  in  such  cir- 
cumstances, have  recourse  to  his  banker. 

Hence,  it  is  more  difficult  to  finance  for  a  manufacturing  establishment 
than  for  the  business  of  a  wholesale  merchant.  The  latter,  having  the 
power  to  buy  goods  at  all  times  on  credit,  has  no  reasonable  ground  for 
asking  regular  advances  from  his  banker.  His  dealings  should  be  con- 
fined, as  a  rule,  to  the  discount  of  bills  given  by  his  customers. 

The  only  payments  a  wholesale  merchant  has  to  make,  which  are  abso- 
lutely imperative,  are  the  customs  duties  and  freight  on  imported  goods. 
It  is  just  as  impossible  to  ask  credit  here  as  it  would  be  for  the  payment 
■of  wages.  But  no  wholesale  merchant  could  reasonably  think  of  com- 
mencing business  without  capital,  and  the  verj"-  lowest  minimum  necessary 
would  be  an  amount  sufficient  to  pay  the  duties  on  the  stock  requisite  to 
couunence  business,  and  thereafter  on  his  average  stock. 

Once  he  has  his  goods  in  warehouse,  he  can  begin  to  sell,  and  with 
such  facilities  as  bankers  are  now  ready  to  offer  for  the  cashing  of  cus- 
tomers' bills,  a  merchant  may,  from  a  financial  point  of  view,  be  said  to  be 

all   the  fluctuations   of   the  trade   of   the  district,   and   its   losses  have   been  a   mere 
fraction  of  such  as  have  been   suffered  by  even  well  managed  Canadian   banks. 

It  would  be  difficult  to  apply  both  of  these  rules  to  such  lines  of  manufacture 
as  saw  milling  and  tanning,  owing  to  the  great  length  •  of  the  manufacturing 
process.  But  the  last  of  them  is  an  absolutely  necessary  requirement  in  every 
case.  And  the  first,  which  Implies  that  there  should  be  a  certain  proportion, be- 
tween the  amount  of  advances  and  the  annual  output,  is  important  as  indicating 
what  is  desirable  in  all  manufacturing  advances,  the  proportion  varying,  of  course, 
with  the  condition  of  the  business. 


12(3  BANKING    AND    COMMERCE. 

able  to  sell  for  cash.  Thus,  by  the  time  tlie  iiayments  for  his  stock  be- 
come due,  the  proceeds  of  his  sales  ought  to  be  sufficient  to  meet  them. 

This  elementary  financial  theory  of  a  wholesale  business  becomes 
modified  by  circumstances  as  time  progresses,  and  no  prudent  man  would 
be  satisfied  with  being  so  wholly  dependent  on  his  credit  with  other  houses 
as  to  have  nothing  left  over  after  payment  of  duties. 

He  will,  of  course,  aim  at  having  far  more  capital  than  that.  But 
even  on  such  a  modicum  of  capital  as  is  indicated,  it  is  clear  that  no  ne- 
cessity should  arise  for  loans  from  a  banker.  From  all  which  the  rule  may 
be  deduced  that  loans  to  a  wholesale  merchant  (as  distinguished  from  the 
discount  of  trade  bills)  should  be  considered  as  irregular  in  the  nature 
of  things,  and  only  to  be  granted  in  exceptional  circumstances. 

When  therefore  a  banker  is  applied  to  by  a  wholesale  merchant  for 
a  loan  in  addition  to  a  discount  of  customer's  bills,  he  is  put  upon  inquiry 
as  to  why  such  a  loan  is  required.  The  reason  commonly  given  is  that 
goods  are  arriving  in  quantity  in  the  Custom  House  and  that  the  duties 
must  be  paid.  But  this,  in  itself,  is  not  a  good  reason.  For,  as  has  been 
observed,  the  capital  of  such  a  house  should  be  sufficient  to  provide  for 
this  requirement.  The  payment  of  customs  dues  can  never  take  a  mer- 
chant unawares.  The  necessity  for  it  must  have  been  seen  long  before- 
hand, and  ample  opportunity  given  for  making  provision.  An  applica- 
tion for  a  loan  may  therefore  indicate  that  purchases  have  been  too  heavy; 
or  that  sales  arc  not  being  vigorously  pushed,  or  that  an  unsuitable  stock 
has  been  laid  in,  or  that  the  customers  of  the  house  cannot  be  depended 
on  for  payments.  Any  of  these  will  cause  the  finances  of  a  wholesale 
house  to  drag  heavily,  and  they  are  all  of  such  a  character  as  to  make  a 
banker  pause.  The  head  of  a  house  may  naturally  be  unwilling  to 
acknowledge  that  any  of  these  suppositions  are  correct,  and  some  are  very 
unwilling  to  talk  to  a  banker  on  the  subject.  Yet  the  application  for  a 
loan  gives  him  the  right  to  make  inquiry;  for  experience  shows  that  such 
things,  if  allowed  to  go  on  uncorrected,  may  be  the  beginning  of  a  course 
which  will  end  in  insolvency. 

There  is  this  further  reason  for  a  banker's  caution  in  this  matter,  that 
a  dealer  in  imported  or  manufactured  goods  cannot  give  a  banker  secur- 
ity upon  them.  A  miller,  a  tanner,  a  pork  packer,  can  pledge  his 
product  as  security  for  advances  under  the  warehousing  clauses  of  the 
Banking  Act.  But  a  wholesale  merchant  cannot  do  this  under  the  Act. 
And  there  is  reason  for  this  distinction  in  the  nature  of  things;  for  a 
■wholesale  merchant's  stock  has  almost  invariably  been  bought  on  credit. 
The  goods  on  his  shelves  are  jirobably  not  yet  paid  for.  It  would  there- 
fore be  contrary  to  every  principle  of  equity  to  allow  a  merchant  to 
pledge  his  goods  for  advances  while  the  claims  of  the  creditors  were 
unsatisfied.  This  being  the  case,  it  has  become  a  practice  for  sucli  loans 
to  be  applied  for  without  security,  and  not  infrequently  for  tliem  to  be 
granttd  in  that  shape.     This  certainly  is  a  deviation  from  sound  banking 


LOANS  TO  MANUFACTURERS  AND  IMPORTERS.   127 

practice.  But  the  whole  system  of  loans  to  wholesale  merchants  is  excep- 
tional;, and  requires  exceptional  treatment  at  the  hands  of  a  banker. 
The  character  of  that  treatment  may  be  indicated  as  follows : 
First,  no  regular  line  of  credit  should  be  arranged  for  in  respect  of 
loans;  that  is,  no  amount  which  a  customer  can  always  have  at  his  com- 
mand. Second,  advances  should  be  temporary;  each  being  applied  for  on 
its  own  merits,  with  the  explanation  of  circumstances.  Third,  they  should 
only  be  allowed  at  certain  seasons,  and  never  last  more  than  two  or  three 
months  at  the  most.  Fourth,  renewals  should  not  be  granted.  Indica- 
tions of  continuance  should  be  carefully  watched  and  promptly  dealt 
with.  If  advances  become  chronic,  security  should  be  insisted  upon. 
Fifth,  it  is  always  desirable,  too,  that  when  such  advances  are  granted  to 
a  firm,  the  endorsement  or  guarantee  of  each  individual  in  its  should  be 
obtained;  for  individual  partners  may  have  separate  estates  which  the 
endorsement  would  bind.  If  the  business  is  carried  on  by  a  joint-stock 
company,  the  guarantee  of  some  of  the  principal  stockholders  would  be 
desirable. 

By  the  observance  of  such  rules  as  these,  and  with  constant  exercise 
of  vigilance,  loans  of  this  character  may  be  granted  without  unreasonable 
risk.^^ 

45  In  the  early  days  of  joint-stock  banking  in  England  and  Scotland,  when  the 
business  was  not  so  well  understood  as  at  present,  numbers  of  accounts  in  the 
manufacturing  districts  of  England  had  drifted  into  the  condition  of  being  largely 
represented  by  fixed  property.  Half  the  cotton  mills  of  Lancashire,  the  woolen 
mills  of  Yorkshire,  and  the  iron  foundries  of  the  "black  district"  were  mortgaged 
to  the  banks  of  that  period,  some  of  which  were  ruined  by  the  heavy  losses  that 
ensued.  These  severe  lessons  have  had  their  fruit  in  the  improved  style  in  which 
bank  advances  are  made  in  these  times  to  the  mutual  advantage  of  both  the  banks 
and  their  customers.  The  same  condition  of  things  prevailed  in  certain  quarters 
at  one  time  in  Canada,  and  with  the  same  result  of  either  embarrassment  or  abso- 
lute ruin. 

In  a  certain  district  of  Canada  where  flour  milling  was  a  leading  industry.  It 
was  well  known  at  one  time  that  nearly  every  mill  it  contained  had  fallen  into 
the  hands  of  the  leading  bank  of  the  district  by  foreclosure  of  mortgage.  This 
was  the  result  of  the  style  of  business  adopted  by  one  who  was  known  as  a  most 
enterprising  and  pushing  manager,  whose  lavish  dealing  with  the  funds  entrusted 
to  him  by  his  head  office  had  not  only  ruined  the  customers  who  dealt  with  him 
but  brought  about  heavy  losses  to  the  bank. 

The  disposal  of  these  properties  and  the  operations  connected  therewith, 
formed  a  principal  part  of  the  occupation  of  the  officer  who  succeeded  the  en- 
terprising manager.  If  the  bank  referred  to  had  been  an  independent  one,  like 
the  banks  in  small  towns  in  the  United  States,  it  would  have  been  ruined  beyond 
redemption;  but,  fortunately  it  was  only  a  branch  of  a  larger  institution  which 
could  afford  to  lose  large  sums  with  no  more  consequences  than  temporary  em- 
barrassment. 


CHAPTER   Xril. 
LOANS  TO  RAILWAYS  AND  RAILWAY  CONTRACTORS. 

Railways  Under  Construction — Peculiar  Dangers — Railways  in 
Operation  —  Contractors  —  Delays  in  Payment  —  Engineer's 
Certificates — Lock-Ups — Contracts  for  Railway  Companies — 
Contracts  for  Public  Works  of  Government. 

THE  development  of  railways  in  modern  times  is  one  of  the  most 
striking  factors  in  our  industrial  progress.  Though  they  do  not 
produce  or  create  anything,  the}'  bring  producer  and  consumer 
more  nearly  together,  and  lessen  the  cost  of  raw  material  to  the  pro- 
ducer and  of  finished  products  to  the  consumer,  so  much  as  to  have  given 
an  enormous  stimulus  both  to  manufacturing  and  trade.  This  has  been 
the  case  even  in  the  older  countries  of  Europe,  whose  every  acre  was 
cultivated  long  ago,  and  whose  means  of  transportation  were  in  a  well 
developed  condition  long  before  railways  were  heard  of.  But  whatever 
stimulus  might  be  given  to  production  and  trade  by  railroads  in  older 
countries,  it  has  been  immeasurably  exceeded  by  the  effect  which  their 
construction  has  produced  upon  the  undeveloped  or  partially  developed 
regions  of  North  America.  Whether  in  the  United  States  or  in  Canada, 
the  eff"ect  of  the  extension  of  railways  into  undeveloped  tracts  of  country 
has  been  such  that  it  may  almost  be  said  that  the  railway  has  created  the 
country.  For,  so  far  as  the  interior  of  the  continent  is  concerned,  when 
we  consider  the  enormous  distances  to  which  the  product  of  the  soil  had 
to  be  carried  to  reach  a  market,  it  will  be  seen  there  was  an  insuperable 
bar  to  profitable  cultivation,  and  that  great  regions  now  populated  and 
prosperous  must  have  remained  in  their  original  state  of  wildness,  but  for 
better  means  of  transit.  But  the  railway  which  penetrates  these  regions 
enables  their  products  to  be  brought  profitably  to  market,  and  so  opens 
up  a  path  to  settlement  and  the  industrial  development  that  follows.  Thus 
it  lias  been  in  all  the  Western  States  of  the  American  Republic,  and  thus 
it  lias  been  in  Canada  in  a  most  remarkable  degree. 

But  at  an  early  stage  in  these  developments  the  intervention  of  the 
banker  has  been  needed.  The  financing  of  nearly  every  railroad  during 
the  period  of  its  construction  has  been  attended  with  not  a  few  financial 
difficulties;  the  only  exception  being  the  railroads  avowedly  undertaken 
as  Government  works.  Of  this  we  have  had  one  conspicuous  example  in 
Canada  in  the  case  of  the  Intercolonial. 

Railway  corporations  have  two  modes  of  raising  money;  viz.,  by  the 
subscription  of  stock,  and  by  the  issue  of  bonds;  the  latter  being  partly 
of  the  nature  of  mortgages,  and  partly  of  long-dated  promissory  notes. 
Subscriptions  on  account  of  stock  are  invariably,  in  these  times,  paid  in 

128 


RAILWAY    LOANS.  12.9 

to  a  banker;  and  this  is  the  point  at  which  the  bank  and  the  railway  first 
come  into  contact.  The  banker  opens  an  account  with  the  company; 
receives  money  on  its  account;  pays  out  that  money  as  construction  pro- 
ceeds, often  at  widely  distant  points  through  tlie  medium  of  its  branches. 
The  bank  also,  through  the  medium  of  bills  of  exchange,  brings  out 
moneys  paid  in  by  subscribers  abroad,  and  places  them  to  the  credit  of 
the  company  in  Canada.  All  the  foregoing  are  simple  and  natural  bank- 
ing transactions,  and  although  the  amounts  involved  are  sometimes  enor- 
mous, amounting  to  tens  of  millions  in  the  course  of  a  single  half-year, 
they  are  not  such  as  to  give  occasion  for  thought  or  anxiety  on  the  part 
of  the  banker.  So  long  as  the  sums  drawn  out  are  no  more  than  the 
sums  paid  in,  the  transactions  are  part  of  the  mere  routine  of  banking. 
This  is  the  elementary  theory  of  banking  in  connection  with  railroads 
during  construction. 

But,  as  a  matter  of  fact,  it  often  hapjiens  that  the  financial  opera- 
tions connected  with  the  building  of  a  railwa}'^  do  not  run  as  smoothly 
as  this.  The  incoming  of  money  does  not  always  keep  pace  with  the  ex- 
citing demands  of  its  outgoing.  These  demands  are  imperative,  consist- 
ing as  they  largely  do  of  wages  of  laborers  and  artisans.  It  has  already 
been  shown  how  necessary  it  is  to  meet  demands  of  this  nature  at  the 
time  the}^  are  due.  It  happens,  therefore,  at  times,  that  emergencies 
arise  which  lead  to  an  application  to  the  banker  for  advances.  The 
banker  is  naturally  the  person  applied  to,  as  the  company  is  having  large 
monetary  transactions  with  him;  and  the  application  can  be  represented 
as  simply  the  honoring,  for  a  short  period,  the  checks  of  the  company, 
until  subscriptions  are  paid  in,  or  bonds  are  sold.  It  has  thus  come 
about  that  many  a  banker  has  been  induced  to  consent  to  advances,  which, 
though  represented,  with  perfect  sincerity,  as  "temporary,"  were  found 
to  have  an  unpleasant  element  of  permanency  about  them  in  practice. 
The  new  subscriptions  or  the  proceeds  of  new  bonds  could  not  in  some 
cases  be  applied  to  the  advance,  inasmuch  as  the  money  was  required  to 
meet  other  and  more  imperative  demands.  The  temporary  overdraft, 
therefore,  went  on,  with  varying  amount,  but  undischarged,  even  for 
years,  until  some  turn  of  events  after  completion  enabled  funds  to  be 
set  aside  to  meet  the  banker's  claim. 

These,  however,  are  not  the  only  contingencies  that  meet  the  banker, 
when,  as  is  generally  the  case  on  this  side  the  Atlantic,  the  money  is 
raised  in  one  country  and  expended  in  another.  The  officials  of  a  road 
under  construction  are  subjected  to  constant  pressure  to  find  funds  for 
vast  jDay-rolls  regularly  recurring,  sometimes  running  up  to  millions; 
and  on  the  banker  demurring  to  increasing  an  overdraft,  would  suggest 
that  he  might  cash  bills  of  exchange  drawn  by  them  on  headquarters. 
They  might  not,  it  is  true,  have  explicit  authority  for  so  doing.  But 
they  would  trust  to  the  exigencies  of  the  case  being  recognized  and  the 
bills  honored.     Such  things  have  been  known,  however,  as  of  these  bills 


1.30  BAXKIXG    AND    COMMERCE. 

being  refused  acceptance  or  recognition,  and  of  the  banker  being  com- 
pelled, to  his  intense  disgust,  to  write  them  off,  as  losses. 

A  case  has  also  happened  where  a  railway,  pushing  works  of  con- 
struction ahead,  for  a  road  of  which  it  has  obtained  control,  but  which 
is  still  carried  on  under  its  old  name,  has  made  arrangements  with  a 
bank  for  supplies  of  money  from  month  to  month  to  be  repaid  periodi- 
cally by  drafts  on  the  headquarters  of  the  company.  For  a. time  the 
arrangement  works  smoothh^,  and  advances  are  paid  off  periodically. 
But,  as  time  goes  on,  money  is  not  paid  in  the  one  country  as  fast  as  it 
is  needed  in  the  other.  The  bankers,  therefore,  are  asked  for  the  peri- 
odical payment  to  be  deferred.  Meanwhile,  outlays  proceed,  advances 
go  on  increasing,  until  at  last  the  bank  is  itself  embarrassed  by  the  huge 
amount  to  which  the  account  has  grown.  Further  advances  are  therefore 
stopped,  and  payment  demanded  of  those  existing.  Then,  to  the  disgust 
and  alarm  of  the  bank,  the  point  is  raised  as  to  which  corporation  has 
had  tlie  advances.  Is  it  the  corporation  that  has  obtained  control  of 
and  absorbed  the  other,  or  the  corporation  which  has  been  absorbed, 
but  which  is  practically  a  mere  name  ?  The  first  repudiates  responsi- 
bility. Litigation  ensues,  and  is  continued  for  years.  Meantime  the 
bank  is  embarrassed  by  the  enormous  amount  of  its  funds  locked  up, 
and  suffers  in  credit  through  the  facts  becoming  known.  The  case  is 
finally  settled  by  an  arrangement  for  a  special  issue  of  bonds,  the  whole 
of  which  are  handed  to  the  bank.  But  of  these  bonds  neither  interest 
nor  principal  is  ever  paid,  and  the  bonds  themselves  are  finally  can- 
celled by  legislative  arrangements,  which  give  the  bank  about  one-tenth 
of  its  advances,  the  remainder  being  a  total  loss.  Largely  as  a  conse- 
quence of  this,  the  bank  ultimately  suspends  payment  and  finally  passes 
out  of  existence. 

Advances  to  a  railway  during  construction  are  therefore  critical  af- 
fairs, and  require  much  judgment  and  caution,  and  also  much  firmness, 
on  the  banker's  part,  in  dealing  with  the  "account.  Such  advances,  if 
once  allowed,  are  almost  certain  to  increase.  And  as  the  disbursements,, 
during  construction  of  even  a  small  railway,  are  very  heavy,  the  pres- 
sure for  advances  may  soon  raise  them  to  large  amounts.  The  only 
safe  rule  for  a  banker  with  an  account  of  this  kind  is  to  be  firm  at  the 
outset,  and  not  to  allow  the  thin  end  of  the  wedge  to  be  inserted  without 
outside  security. 

It  is  a  delusion  to  suppose  that  a  railway  corporation  must  in  the 
nature  of  things  be  good  to  repay  advances.  A  banker,  until  he  has 
learned  the  contrary  by  experience,  finds  it  difficult  to  believe  that  a 
corporation,  with  a  paid-up  capital  of  millions,  can  fail  to  pay  its  debts. 
But  reflection  would  teach  him  that  when  the  whole  of  the  capital  afore- 
said has  been  expended  in  works,  from  which  it  can  never  be  extracted 
again,  it  is  impossible  that  capital  can  furnish  the  means  of  repaying 
what    he    has    lent.       Still  more  is  this  the  case  when  such  a  company 


RAILWAY    LOANS.  131 

stretches  its  borrowing  capacity  in  tlic  shape  of  bonds  to  the  utmost 
extent  to  which  the  market  will  take  them,  which  bonds  are  sometimes 
constituted  by  law  a  first  mortgage  on  all  the  property  of  the  company. 
The  banker  therefore  finds  himself  in  a  difficult  position  if  he  attempts 
recovery  by  law;  he  indeed  finds  this  impossible. 

It  may  be  taken  therefore  as  an  axiom  in  banking,  that  advances  to 
raihvays  in  construction  should  never  be  undertaken  without  security 
beyond  that  of  the  railway  itself.  Even  if  bonds  are  offered  as  security 
they  should  be  received  with  caution,  for  the  proper  mode  of  raising 
money  on  the  bonds  of  a  railway  company  is  to  place  them  on  the 
market.  That  is  an  infallible  test  of  their  value.  The  market  price  is 
simply  a  consensus  of  the  opinions  of  the  financial  world. 

Many  instances  have  been  known,  of  a  finished  railway  barely  pay- 
ing working  expenses,  and  our  own  Intercolonial  railway  is  a  conspicu- 
ous instance  of  this.  The  bonds  of  such  a  road  are,  of  course,  valuer 
less,  so  long  as  this  state  of  things  continues.  They  may  have  a 
speculative  value,  in  view  of  future  developments.  But  improvement 
may  never  be  realized. 

Advancing  on  the  strength  of  future  stock  subscriptions  may  prove 
as  delusive  a  foundation  for  a  loan  as  anything  that  has  been  referred 
to.  Experience  has  proved  that  when  the  outlook  has  become  distinctly 
unfavorable  subscribers  will  not  only  neglect  to  pay  their  calls,  but 
will  resist  legal  process  by  every  device  known  to  the  law. 

Advances  to  railways  in  actual  operation,  however,  rest  on  a  differ- 
ent footing.  When  a  road  with  an  established  traffic  desires  a  temporary 
loan  for  the  purpose  of  laying  in  supplies,  let  us  say,  of  fuel  at  the 
approach  of  winter,  such  a  loan  may  be  regarded  as  legitimate  and  safe. 
For  the  repayment  of  such  a  loan  would  practically  be  a  disbursement 
for  working  expenses,  and  would  take  precedence  of  any  claim  con- 
nected with  its  bonds  or  stocks.  But  then  a  banker  must  exercise  a  dis- 
criminative judgment  in  regard  to  advances  like  this:  for  there  have 
been  instances  of  railroads  getting  into  such  low  water  that  no  depend- 
ence could  be  placed  upon  them  for  any  sort  of  payment.  This,  how- 
ever, cannot  fail  to  be  known  to  the  bankers  of  such  a  company,  and 
they  would  be  wanting  in  judgment  to  a  singular  degree  if  they  did 
not  treat  such  a  railway  as  they  would  an  impecunious  mercantile  bor- 
rower. 

A  railway  corporation,  in  fact,  comes  to  have  what  may  be  called  a 
commercial  standing,  exactly  as  a  merchant  does.  It  is  not  common  for 
mercantile  agencies  to  enter  railways  in  their  books,  and  give  them 
grades  of  credit;  but,  if  they  did,  they  would  find  it  necessary  to  use 
as  many  symbols  as  they  do  in  case  of  merchants.  Some  would  have 
the  highest  grade  of  credit  that  any  marks  could  indicate,  while  others 
would  be  found  at  the  other  end  of  the  scale.  But  as  there  are  no  books 
of  reference  indicating  the  standing  of  railways,  and  any  reference  to 


132  BANKING    AND    COMMERCE. 

their  supposed  capital  is  utterly  delusive,  a  banker  must  himself  take 
means  to  find  out  what  is  necessary,  only  taking  care  that  he  does  not 
find  it  out  by  costly  experience. 

Railway  Contractors. 
Closely  connected  with  the  foregoing  are  advances  which  banks  are 
often  called  to  make,  during  construction,  to  railway  contractors. 
Through  the  hands  of  this  class  of  the  community  very  large  sums  pass 
during  the  course  of  construction,  and  the  expenditures  of  a  single 
month,  at  times,  run  up  into  millions  of  dollars.  The  usual  course  is 
for  payments  for  work  to  be  made  on  the  certificate  of  an  engineer  or 
inspector,  at  periodical  times,  named  in  the  contract,  and  usually  once 
a  month.  This  process  seems  very  simple  and  not  likely  to  lead  to  finan- 
cial difficulties.  But  experience  teaches  otherwise,  as  will  now  be  shown. 
Any  person  or  firm  engaging,  or  contracting,  as  the  phrase  is,  to  do  a 
certain  piece  of  work,  will  require,  before  he  begins  it,  a  considerable 
stock  of  material  and  plant.  He  must  have  horses,  barrows,  shovels, 
wagons,  and  a  variety  of  other  tools  and  plant  of  more  or  less  value, 
according  to  the  extent  of  his  contract.  In  some  cases  the  whole  of  the 
contractor's  capital  will  be  invested  in  his  plant.  If  he  opens  a  bank 
account,  and  it  is  almost  a  necessity  that  he  should,  he  will  inform  the 
banker  of  the  amount  of  money  he  has  so  invested,  and  will,  naturally, 
open  to  him  the  amount  of  the  contract,  the  mode  and  time  of  payment 
for  his  work,  and  so  on.  In  fact,  he  will  explain  his  position,  so  that, 
in  case  he  requires  advances,  the  banker  may  understand  what  to  do. 
In  a  majority  of  cases,  a  contractor  will  want  advances  before  he  has 
got  on  far  with  his  work,  for  the  pay-rolls  of  his  men  will  come  due, 
and  must  be  met,  before  his  receipts  from  the  company  come  in.  For 
there  is  always  an  interval,  during  which  his  work  is  being  measured, 
his  account  passed,  and  payment  received  in  the  treasurer's  office.  This 
interval  may  be  days  or  it  may  be  weeks,  but  his  little  army  of  workmen 
cannot  wait  for  weeks,  or  even  for  days;  they  must  be  paid,  or  they 
will  not  go  on  with  the  work.  Now,  some  contractors  have  available  cap- 
ital enough  to  enable  them  to  pay  their  wages  in  the  interval;  that  is, 
they  have,  in  addition  to  the  capital  they  have  expended  on  the  plant, 
or  material,  sufficient,  at  least,  to  meet  a  month's  pay-roll  of  their  men. 
Men  of  such  capital  as  this  seldom  require  advances  at  an  early  stage 
of  a  contract,  thougli  they  may  do  so  later  on.'*^'  But  the  majority  of 
contractors  have  not  so  much  capital  as  this,  and  arc  in  the  habit  of 
applying  to  a  banker  for  advances,  tlie  ground  for  such  application  be- 


46  The  author  well  remembers  an  aconmit  oponod  witli  the  bank  in  which  his 
early  days  were  passed,  by  the  contractors  for  ilie  works  of  the  Manchester  & 
ShefHold  Railway.  They  deposited  a  single  sum  of  £80,000.  iMige  as  this  was, 
it  was  all  absorbed  as  the  work  v/ent  on,  and  they  had  to  apply  to  the  bank  for 
advances. 


RAILWAY    LOANS.  1^3 

ing  that  so  much  work  has  been  done  or  will  be  done  at  the  end  of  the 
month,  when  the  account  will  be  presented,  certified  and  paid.  And  as 
payment  is  supposed  to  be  sure,  the  borrower  will  represent  that  ad- 
vances must  be  safe.  In  many  cases,  the  contractors  will  give  to  the 
bank  a  written  order  on  the  treasurer  of  the  company,  directing  him  to 
pay  the  account  to  the  bank  when  certified.  This  might  seem  to  make 
the  advance  ])crfectly  safe,  especially  if  the  treasurer  undertakes  to 
comply  with  the  order.  But  a  treasurer  will  almost  certainly  avoid  bind- 
ing himself  to  pay  a  specified  sum  of  money  at  a  specified  time.  He 
will  generally  simply  acknowledge  the  receipt  of  the  letter,  or  if  he 
goes  further,  he  will  say  that  it  has  been  placed  on  file,  probably  calling 
the  banker's  attention  to  the  fact  that  his  duty  is  only  to  pay  whatever 
sum  may  be  certified  by  the  engineer  of  the  company  to  be  due.  And 
here  we  touch  the  vital  point  of  the  w^hole  matter,  for,  as  many  bankers 
have  found  to  their  cost,  nothing  is  more  common,  in  railway  work, 
than  for  disputes  to  arise  betw^een  the  contractor  and  the  engineer,  and 
for  such  disputes  to  remain  unsettled  for  a  length  of  time.  In  the  in- 
terval, possibly,  payments  may  be  made  on  account,  but  not  nearly 
enough  to  cover  the  banker's  advance.  Meantime,  another  month's  work 
has  been  going  on,  and  pi*essure  is  put  upon  the  banker  for  further  ad- 
vances, which  he  may  yield  to,  under  expectation  of  a  speedy  adjust- 
ment of  differences.  This  the  contractor  will  give  strong  assurances  of. 
The  banker  therefore  is  in  a  difficult  position.  If  he  refuses  to  advance 
further,  his  customer  cannot  meet  his  payments.  The  work  must  there- 
fore stop,  his  contract  will  be  annulled,  and  any  drawback  in  the  hands 
of  the  company  forfeited.  This  will  almost  certainly  result  in  a  loss 
to  the  bank;  for  such  a  contractor's  capital  will  only  be  represented  by 
plant  and  material,  w^hich  will  depreciate  to  a  mere  nothing  if  sold, 
though  it  may  have  cost  a  very  large  sum  of  money.  On  the  other  hand, 
if  he  goes  on,  he  may  continue  to  have  a  profitable  account  and  come 
out  safely  in  the  end.  Perhaps  he  may  stipulate  for  an  extra  charge  in 
consideration  of  the  extra  risk;  but  whether  he  comes  out  well  or  not 
will  largely  depend  upon  whether  the  contract  is  a  good  one,  and  what 
the  amount  afl'ected  by  the  dispute  is.  It  may  be  $5,000;  it  may  be 
$50,000;  it  may  be  even  $500,000;  but  a  contract  is  rarely  finished  with- 
out a  dispute  of  some  kind,  as  to  the  quality  or  quantitj^  of  the  work; 
whether  a  certain  amount  of  material  removed  was  not  rock  instead  of 
earth,  whether  the  foundations  of  a  bridge  are  properly  laid,  or  what 
not.  Sometimes  engineers  are  to  blame  for  these  disputes ;  sometimes 
contractors.  But  in  any  dealings  between  a  banker  and  a  contractor  such 
possible  contingencies  must  be  taken  into  account.  Some  of  the  most 
exasperating  "lock-ups"  that  have  been  known  in  the  history  of  banking 
have  arisen  in  this  manner.  Such  disputes  often  lead  to  lawsuits;  and 
even  though  an  award  may  be  made  in  the  contractor's  favor,  a  delay 
of  years  may  transpire,  during  which  interest  has  been  accumulating  and 


131  BANKING    AND    COMMERCE. 

costs  mounting  up,  while  the  amount  of  the  judgment  may  be  far  less 
than  the  debt  due  to  the  bank. 

If  the  contractor  has  otlier  resources  than  the  capital,  in  his  plant 
and  gives  the  bank  security  on  them,  all  may  be  well  in  the  end ;  if  not, 
the  result  may  be  that  the  "lock-up,"  or  a  considerable  portion  of  it, 
may  become  a  bad  debt. 

No  banker,  therefore,  will  consider  himself  safe  .by  the  mere  fact 
that  he  has  security,  so  called,  in  the  shape  of  an  order  on  a  railway 
company  to  pay  him  what  they  owe  the  contractor,  if  the  order  be  in 
general  terms  and  unaccepted. ^^ 

But  all  advances  to  contractors  are  not  such  simple  matters  as  the 
foregoing.  Not  seldom  a  contractor  will  approach  a  banker  before  work 
has  begun  with  a  proposal  for  a  credit  of  a  round  amount,  liaving  no 
relation  to  any  specific  sum  as  earned,  or  to  be  earned,  in  any  particular 
month.  And  the  banker,  knowing  him  to  be  a  man  of  good  standing, 
and  to  be  the  owner  of  real  property  in  the  neighborhood;  knowing  also 
that  he  understands  his  business,  and  that  his  account  may  yield  large 
and  profitable  transactions,  may  grant  such  a  credit.  Yet  a  portion  of 
the  money  advanced  may  be  used  to  purchase  that  miscellaneous  collec- 
tion of  articles  known  as  a  contractor's  plant,  which  costs  so  much,  and 
is  ultimately  worth  so  little.  Or  there  may  be,  for  some  reason,  unusual 
delay  in  passing  the  accounts,  or  accidents  may  transpire  from  water, 
fire,  or  dynamite;  or  there  may  be  miscalculation  as  to  the  nature  of 
obstacles  to  be  overcome,  especially  in  deep  cuttings,  high  embank- 
ments, or  bridge  building.  Or  the  contractor  may  have  miscalculated 
the  cost  of  numerous  materials  he  requires  to  use;  in  fact,  the  casualties 
are  almost  innumerable,  and  what  position  the  contractor  may  be  in  by 
the  time  he  gets  to  the  end  of  his  work,  a  mere  lottery.  It  may  be  a 
fortune;   it  may  be  bankruptcy. 

All  that  is  said  in  regard  to  contractors  for  railways  applies  even  in 
a  stronger  degree  for  contractors  in  government  works.  And  for  this 
reason,  that  whatever  delays  may  be  experienced  in  the  passing  of  a 
contractor's  account  by  a  railway  company,  they  are  sure  to  be  more 
protracted  in  a  government  department. 

The  habit  of  delay,  the  cumbrous  circumlocutory  system  which  in- 
heres in  all  government  offices,  which  it  is  vain  to  remonstrate  against, 
is  certain  to  bring  about  greater  delays  in  this  case  than  in  the  other. 
And  in  case  of  dispute,  the  engineer  or  inspecting  ofiicer  of  a  govern- 
ment department  is  apt  to  be  more  exacting,  and  more  firmly  set  in  his 
opinions,  tlian  the  officer  of  a  railway  corporation.     And  in  case  the  dis- 

47  It  lias  not  soldom  been  the  case  in  difTicult  times  tliat  a  contractor  could 
not  gret  his  certificate  paid,  even  when  there  was  no  dispute  about  it.  owing  to 
the  company  being  unable  to  float  bonds,  or  to  get  calls  paid,  or  to  make  ef- 
ficient banking  arrangements.  Numerous  cases  of  this  kind  have  arisen  where 
the  works  were  on  this  side  the  Atlantic  wh'lst  the  money  had  to  be  raised 
on   the   other. 


RAILWAY    LOANS.      '  135 

pute  leads  to  law  proceedings,  tlie  machinery  requisite  to  carry  on  such 
proceedings  leads  to  delays  which  are  interminable.  Many  an  unfortu- 
nate suitor  has  been  driven  to  distraction,  or  to  bankruptcy',  by  such 
suits;  yet  there  is  generally,  on  the  part  of  the  officers  that  defend 
them,  a  sort  of  consciousness  that  they  are  doing  well  in  protecting  the 
public  at  large  against  unjust  claims,  on  the  part  of  individuals;  a  most 
formidable  obstacle  to  settlement. 

There  is  this,  however,  to  be  noted,  as  a  set-off  against  all  disadvan- 
tages of  doing  work  for  a  government,  that  payment,  at  any  rate  in 
countries  like  Canada,  Great  Britain,  and  the  United  States,  is  certain 
in  the  end. 

But  the  same  cannot  be  said  of  all  governments,  as  has  been  seen. 


CHAPTER   XVIII. 

LOANS  AND  ADVANCES  TO  GOVERNMENTS  AND  MUNICI- 
PAL CORPORATIONS. 

England — The  United  States — France — Insolvent  Governments 
OF  Europe — The  Separate  States  of  the  Union — Separate 
Provinces  of  Canada — Municipal   Corporation   Loans. 

THE  dealings  of  bankers  with  governments  have  peculiarities  of  their 
own,  and  at  times  are  so  important  that  the  whole  foundation  of  a 
banking  corporation  has  rested  upon  them.  This  was  the  case  with 
the  Bank  of  England,  the  very  purpose  of  whose  establishment  over  two 
centuries  ago  was  to  aid  the  finances  of  the  Government  of  the  day. 

By  the  terms  of  its  constitution  its  whole  capital  of  one  million  ster- 
ling was  loaned  to  the  Government  of  the  time,  and  this  primal  condition 
has  been  observed  down  to  the  present  day  through  all  the  changes  and 
vicissitudes  of  the  last  two  centuries.  Although  the  capital  of  the  bank 
has  been  increased  from  time  to  time  until  it  now  amounts  to  fourteen 
millions  sterling,  there  never  was  a  time  when  the  whole  of  it  was  not  lent 
to  the  Government.  The  debt  is  represented  by  those  Government  securi- 
ties which  regularly  appear  in  its  published  balance-sheet,  and  with  which, 
so  far  as  the  amount  of  its  capital  is  concerned,  it  cannot  part  without  a 
forfeiture  of  its  charter. 

In  consideration  of  this,  the  whole  business  of  the  Government  of  Eng- 
land— using  that  word  in  its  broadest  sense — has  alwa^'S  been  done  with 
this  one  bank. 

The  Bank  of  England,  however,  is  not  a  Government  institution,  as 
is  often  supposed.  It  is  distinctly  a  banking  corporation  with  its  own 
body  of  stockholders  who  elect  its  own  board,  appoint  its  own  officers, 
receive  dividends  out  of  profits,  and  hold  annual  meetings  exactly  as  do 
other  banks.  In  all  these  respects  the  Bank  of  England  is  on  the  same 
footing  as  an  ordinary  joint-stock  bank.  The  only  difference  is  that  in 
consideration  of  its  relation  to  the  Government  it  has  powers  of  circulation 
of  a  peculiar  kind,  as  opened  up  in  another  chapter. 

But  notwithstanding  that  the  Bank  of  England  is  not  a  Government 
institution,  the  fact  that  the  whole  financial  business  of  the  Government 
passes  through  its  hands,  has  always  been  held  to  constitute  a  claim  on  the 
part  of  the  Government  for  financial  assistance  should  it  ever  be  needed; 
and  that  in  preference  to  the  commercial  community.  If  the  commercial 
community  were  urgent  for  discounts  at  the  same  time  as  a  Chancellor 
of  the  Exchequer  was  urgent  for  advances,  there  can  be  no  question  which 
of  them  would  have  the  preference.  Yet  the  instinct  of  self-preservation 
136 


LOANS  AND  ADVANCES  TO  GOVERNMENTS.    137 

is  as  strong  with  the  Governor  and  Company  of  the  Bank  of  England  as 
it  is  with  the  directors  of  any  other  corporation,  and  that  would  undoubt- 
edly prevail  in  case  the  demands  of  the  Government  were  likely  to  endan- 
ger its  existence.  This,  of  course,  has  been  well  understood  by  every 
Chancellor  of  the  Exchequer  from  the  beginning,  and  no  demand  would 
be  made  upon  the  bank  that  would  be  likely  to  bring  it  into  danger.  The 
bank  is  altogether  too  valuable  an  adjunct  for  any  Government  to  allow 
its  usefulness  to  be  imperilled ;  besides,  there  are  other  ways  in  which  the 
Government  could  borrow  to  meet  pressing  emergencies,  such  as  the  issu- 
ing of  Exchequer  bills  and  so  forth.  Yet  undoubtedly  it  has  happened 
at  times  that  the  directors  of  the  bank  must  have  felt  their  position  with 
the  Government  to  be  burdensome,  notwithstanding  the  privilege  of  having 
its  notes  made  legal  tender.  A  natural  longing  for  freedom  to  use  their 
immense  capital  in  a  way  that  might  seem  agreeable  to  their  own  judg- 
ment as  directors  of  other  corporations  could  do,  would,  at  times,  almost 
of  necessitj'  arise,  and  if  it  did  so  arise,  would  be  pardoned. 

The  principle  of  lending  the  whole  capital  of  a  bank  to  the  Govern- 
ment prevails  also  in  the  United  States,  as  has  been  set  forth  in  another 
chapter.'  Most  of  the  National  banks  lend  their  whole  capital  to  the 
Federal  Government,  and  receive  in  acknowledgment  bonds  for  the  amount. 
The  banks  are  authorized  to  issue  circulating  notes  on  the  security  of 
these  bonds  and  every  possible  safeguard  has  been  devised  in  order  to 
render  these  notes  secure.  The  Government  retains  the  custody  of  the 
bonds,  thus  insuring  that  the  bank  cannot  dispose  of  them.  The  Govern- 
ment also  furnishes  the  notes  to  the  bank,  thus  insuring  that  the  proper 
amount  and  no  more  shall  be  put  into  circulation.  These  notes,  though 
absolutely  secured  by  the  Government,  were  never  made  a  legal  tender, 
the  reason  probably  being  that  the  Government  itself  became  an  issuer 
of  legal-tender  circulating  notes,  and  is  so  to  this  day. 

The  Bank  of  France  has  a  more  intimate  connection  with  the  Govern- 
ment of  the  day,  whatever  its  character  might  be,  than  the  Bank  of  Eng- 
land. The  Government  is  always  represented  influentially  on  its  board, 
so  that  the  obligation  to  meet  its  necessities  bears  upon  it  with  even  a 
stronger  pressure  than  in  the  Bank  of  England.  Still,  the  Bank  of 
France  is  not  a  department  of  the  Government,  and  its  advances  must  be 
regulated  in  the  last  instance  by  the  all-prevailing  law  of  self-preserva- 
tion. 

It  might  be  supposed  that  advances  to  governments  must,  in  the  nature 
of  things,  be  safe.  But  experience  teaches  some  bitter  lessons  in  this 
respect.  All  governments  are  not  like  the  Government  of  England.  There 
have  been  times,  revolutionary  times  of  course,  when  the  obligations 
even  of  the  Government  of  France  became  utterly  valueless,  and  its 
promissory  notes  so  depreciated  that  a  thousand  francs  of  them  would 
hardh"  buy  a  loaf  of  bread.  Yet  these  were  secured  by  assignments  of 
Government  lands,  and  hence  bore  the  name  of  assignats.  A  similar  state 
of  things  prevailed  in  revolutionary  times  on  this  Continent  when  what 


138  BANKINXt    and    CO^rMERCE. 

was  known  as  Continental  money  of  the  revolting  colonies  became  as  much 
depreciated  as  the  assignats  of  France. 

Of  this  state  of  things  we  have  seen  a  repetition  in  recent  times  with 
regard  to  notes  issued  by  the  revolting  Southern  States.  These  became, 
every  one  of  them,  absolutely  worthless.  It  is  well  known  in  the  higher 
circles  of  finance  in  Europe  that  the  Government  of  Spain  has  more  than 
once  compromised  with  its  creditors,  exactly  as  a  merchant  does  when  he 
cannot  pay  his  debts.  What  is  more,  that  Government  has  even  com- 
promised on  its  compromise. 

At  this  very  time  the  Government  of  Turkey  is  under  heavy  default 
on  its  obligations,  and  if  it  were  a  railway  company,  we  should  say  it  was 
in  the  hands  of  a  receiver.  A  certain  portion  of  its  finances  are  adminis- 
tered by  representatives  of  its  bondholders,  comprising  French  and  Eng- 
lish capitalists,  each  of  whom,  in  terms  of  a  year  about,  receives  certain 
allocated  revenues,  and  after  appropriating  a  certain  sum  for  the  interest 
on  bonds,  pays  over  the  balance  to  the  Turkish  Government,  if  there 
be  any. 

A  government  is  unlike  any  other  debtor  in  this  respect,  that  if  de- 
fault is  made,  there  is  no  mode  of  compelling  payment  except  by  going 
to  war.  In  all  ordinary  cases  of  debt  the  remedy  is  to  appeal  to  the 
judgment  of  the  court,  which  judgment  will  be  enforced  against  the 
debtor  by  the  Government.  But  when  a  Government  itself  is  the  debtor, 
there  is  no  higher  authority  to  appeal  to,  unless  in  these  times  the  interna- 
tional tribunal  of  The  Hague  may  be  considered  such.  But  how  could 
that  tribunal  enforce  its  decisions.^  Nothing  but  the  terrible  arbitrament 
of  war  will  meet  the  case.  Now,  private  persons,  no  matter  how  rich  and 
powerful,  cannot  levy  war.  Their  case  must,  therefore,  if  it  is  to  be 
enforced  at  all,  be  taken  up  by  their  own  Government,  which  if  payment 
is  refused,  can  declare  war,  seize  custom-houses  and  ships,  and  bring  the 
whole  machinery  of  the  defaulting  Government  to  a  stand.  This  was  the 
raison  d'etre  of  the  measures  taken  against  the  Republic  of  Venezeula  by 
Germany  and  England  in  1902. 

Bankers  therefore  who  keep  accounts  with  governments  and  make 
advances  to  them  have  always  this  risk  to  reckon  with.  They  cannot  com- 
pel payment.  Even  if  a  government  endeavors  to  satisfy  the  bank  by  an 
issue  of  bonds,  there  are  difficulties  and  disadvantages  even  in  this  simple 
process.  If  the  Government  is  a  constitutional  one,  bonds  cannot  be 
issued  without  authority  of  Parliament;  and  such  an  issue  may  become  a 
matter  of  fierce  contention  between  opposing  parties,  may  be  delayed 
indefinitely,  or  refused  altogether.  Or  if  the  government  has  succeeded 
in  obtaining  authority  to  negotiate  a  loan,  it  may  have  already  exhausted 
its  credit,  in  which  case  it  cannot  press  more  bonds  upon  the  market 
without  a  heavy  sacrifice.  Canada  itself  before  Confederation,  consist- 
ing only  of  Upper  and  Lower  Canada  (corresponding  to  the  present 
Provinces  of  Ontario  and  Quebec)  had  sunk  so  low  in  credit  that  its 
London  agents  were  unable  to  place  further  loans  upon  the  market  ex- 


LOANS  AND  ADVANCES  TO  GOVERNMENTS.  139 

■cept  at  a  heavy  sacrifice.  These  agents  being  under  heavy  advances 
themselves,  at  one  time  absohitely  refused  to  increase  these  advances,  and 
wrote  letters,  as  may  be  seen  in  the  Blue  Books  of  the  time,  to  the  Finance 
Minister  of  Canada  couched  in  terms  exactly  similar  to  those  employed  by 
a  banker  to  a  debtor  whose  bills  were  overdue.  It  was  natural,  therefore, 
under  these  circumstances  that  the  bankers  of  the  Government  in  Canada 
should  be  called  on  for  advances  to  a  constantly  increasing  amount,  which 
advances  becoming,  at  length,  really  embarrassing,  led  to  consultations 
and  conferences  which  finally  ended  in  the  proposal  for  a  Government 
issue  of  circulating  notes.  The  present  legal-tender  note  issue  of  the 
Government  of  Canada  had  its  origin  in  this  way. 

Since  this  great  settlement  the  credit  of  the  Government  of  Canada 
has  steadily  improved,  and  its  bond  issues  are  almost  on  as  high  a  level 
as  those  of  England.  Its  relations  with  its  bankers  have  therefore  never 
since  ceased  to  be  satisfactory;  and  at  times  when  other  Canadian  banks 
have  been  called  on  to  co-operate  in  placing  loans  on  the  London  market, 
they  have  gladly  consented  to  do  so.  It  is  to  be  noted,  however,  that  the 
Government  of  Canada,  through  all  the  periods  of  strain  and  stress  of 
commercial  and  financial  depression  has  never  failed  to  meet  the  interest 
on  its  bonds  to  the  day. 

There  are,  however,  other  forms  of  Government  advances  than  those 
referred  to;  namely,  those  of  the  separate  States  of  the  American  Union, 
or  of  the  separate  Provinces  of  the  Dominion  of  Canada.  Each  of  these 
has  its  own  financial  system.  It  levies  taxes  within  certain  limits,  collects 
and  disburses  revemie,  and  places  bonds  upon  the  market  exactly  in  the 
same  manner  as  an  independent  State  does.  Each  is  a  separate  financial 
entity,  and  has  a  character  and  credit  of  its  own. 

The  Provinces  of  Canada  differ  widely  in  their  financial  position;  but 
all  have  maintained  a  reputation  for  meeting  interest  on  their  bonds  with 
as  much  regularity  as  the  Dominion  Government  itself.  Nevertheless, 
there  would  be  a  wide  dif!'erence  of  judgment  in  the  case  of  an  application 
for  loans  as  between  one  Province  and  another.  This  matter  is  well 
imderstood  by  financiers. 

As  to  the  mode  in  which  pressure  could  be  brought  to  bear  in  case  of 
difficulty  or  embarrassment,  an  appeal  in  Canada  would  undoubtedly  be 
made  to  the  Dominion  Government,  which  Government  possesses  powers 
in  the  way  of  compulsion  in  the  fact  of  its  granting  subsidies  to  the 
different  Provinces.  The  case  may  never  arise  when  the  question  of  with- 
holding a  portion  of  these  subsidies  to  meet  the  claims  of  creditors  may 
become  a  practical  one.  Nevertheless,  it  is  conceivable  that  under  circum- 
stances, say,  of  exceptional  extravagance  in  expenditure  on  the  part  of  a 
particular  Province  and  consequent  default,  the  claims  of  the  creditors 
may  be  carried  before  the  higher  power  and  demand  made  that  pressure 
'be  put  upon  the  defaulting  Province. 

In   this   respect   the   Canadian   Provinces   differ   from   the   States   of 


140  BANKING    AND    COMMERCE. 

America.  The  latter  receive  no  subventions  from  the  Federal  Govern- 
ment, and  their  finances  are  on  an  entirely  independent  basis. 

It  may  be  laid  down  as  a  general  principle  that  the  advances  of  a  bank 
to  a  Government  need  to  be  regulated  by  the  same  fundamental  rules  as 
those  to  a  municipality  or  a  business  corporation.  A  prudent  banker 
dealing  with  a  Government  will  keep  advances  down  to  such  a  level  that 
they  can  be  repaid  out  of  the  j'ear's  revenue.  These  advances  should 
always  be  represented  by  and  rest  upon  this  asset  within  sight;  with  the 
exception,  of  course,  of  advances  in  anticipation  of  the  floating  of  a  duly 
authorized  loan;  in  which  case  the  sole  matter  for  consideration  will  be 
whether  it  is  likely  to  be  successfully  placed  upon  the  market. 

But  in  the  case  of  a  Government  undertaking  great  works  of  con- 
struction, such  as  Canada  has  more  than  once  undertaken,  to  its  embar- 
rassment, a  banker  will  be  careful  lest  his  advances  do  not  eventuate  in 
a  "lock-up"  which  is  embarrassing  to  himself. 

LoAXs  TO  Municipal  Corporations. 

This  is  a  branch  of  banking  advances  in  which  grievous  mistakes 
have,  ^t  times,  been  made,  and  respecting  which  it  is  desirable  to  act 
according  to  fixed  rules  suggested  by  experience. 

It  will  be  found  on  consideration  that  the  same  general  rules  and  con- 
siderations apply  here  that  need  to  be  observed  in  other  lines  of  banking 
advances.  In  the  business  of  a  corporation,  as  in  that  of  a  manufacturer, 
there  are  expenditures  on  permanent  works,  and  expenditures  which  may 
be  termed  "current  and  annual." 

It  is  evident  that  the  first  class  of  expenditures  should  be  represented 
by  bonds  spread  over  a  term  of  years,  and  that  only  expenditures  of  a  tem- 
porary character,  resting  upon  collectible  revenue,  should  be  represented 
by  loans  from  banks.  With  these  two  leading  principles  kept  well  in  mind 
a  bank  may  steer  its  way  safely  through  this  class  of  business. 

There  are  enterprising  corporations  as  there  are  enterprising  manu- 
facturers, and  the  readiest  way  of  obtaining  money  for  schemes  of  im- 
provement and  extension  is  to  apply  to  the  bank  where  the  account  is  kept. 

Now,  there  are  expenditures  regularly  going  on  in  every  municipality 
to  provide  for  which  an  annual  levy  of  taxes  is  made.  It  is  obvious  there- 
fore that  a  bank  may  reasonably  make  advances  to  the  amount  of  such 
levy,  pending  the  collection  of  taxes,  of  course,  with  a  fair  allowance  for 
such  as  are  not  collected  or  collectible. 

But  expenditures  for  permanent  improvements  can  rarely  be  provided 
for  out  of  the  annual  levy.  The  money  required  should  therefore  not  be 
borrowed  from  a  bank,  unless  indeed,  bonds,  duly  authorized,  are  about 
to  be  put  on  the  market,  and  a  loan  is  desired  in  anticipation.  In  that 
case  the  banker's  business  will  be  to  see  that  the  bonds  are  such  as  are 
likely  to  find  favor  in  the  market. 

But  even  during  the  currency  of  a  year,  a  banker  may  need  to  be 
careful  about  the  amount  he  advances.     An  era  of  extravagance  will  some- 


LOANS  AND  ADVANCES  TO  GOVERNMENTS.     Ml 

times  set  in  with  a  municipality  under  the  regime  of  an  enterprising  mayor 
•or  council,  exactly  as  it  may  with  an  individual.  In  that  case  there  will 
be  strong  pressure  put  upon  a  corporation  banker  to  extend  his  advances 
beyond  due  bounds.  He  will  then  need  to  remember  that  there  are  charges 
upon  the  income  of  the  municipality  which  take  precedence  of  his  advances. 
Wages  of  employees,  for  example,  and  interest  on  bonds;  these  cannot 
be  left  in  abeyance.  For  it  has  been  the  just  pride  of  Canadian  munici- 
palities (with  one  or  two  exceptions  after  the  collapse  in  the  Northwest) 
that  they  never  made  a  default  in  their  bonds,  either  of  interest  or  prin- 
cipal. 

In  carrying  on  the  account  of  a  corporation  a  banker  will  need  to 
keep  the  foregoing  in  view.  He  will  also  be  careful  not  to  allow  one 
year's  advances  to  be  carried  over  into  another.  Each  year  should  stand 
on  its  own  foundation. 

This  is  the  regular  and  normal  working  of  advances  to  corporations. 
But  both  in  times  of  prosperity  and  adversity  there  are  apt  to  arise  circum- 
stances which  militate  against  it.  In  times  of  expansion  and  prosperity 
when  a  close  watch  is  not  kept  over  the  finances  by  corporation  officials, 
expenditures  of  a  fixed  character  sometimes  get  so  mixed  with  those  that 
are  temporary  that  the  moneys  advanced  for  the  one  may  become  locked 
up  in  the  other.  This  is  especially  the  case  when  advances  are  made  in 
the  form  of  an  overdrawn  current  account.  Nothing  is  more  easy  than  for 
a  treasurer  or  finance  committee  to  issue  cheeks  ad  libitum,  the  result  of 
which  is  that  the  banker  finds  himself  at  the  close  of  a  corporation  year 
with  a  heavy  undischarged  debt. 

This,  of  course,  may  not  give  a  banker  the  same  anxiety  as  if  the  debt 
were  against  a  mercantile  firm.  A  corporation  cannot  go  out  of  business 
as  a  merchant  can;  and  the  cases  of  corporations  being  absolutely  unable 
to  pay  their  debts  have  been  extremely  rare.  Usually  the  worst  conse- 
quence of  abnormal  advances  is  that  a  certain  amount  of  money  is  locked 
up.  Now,  though  a  "lock  ujd"  is  not  the  same  as  a  bad  debt  in  its  ultimate 
consequences,  it  may,  if  large  enough,  be  a  cause  of  real  embarrassment. 
It  may,  however,  be  thought  that  a  banker's  advances  can  always  be  pre- 
vented from  becoming  embarrassing  by  a  corporation  issuing  bonds,  or  in 
a  last  resort,  exercising  the  power  of  taxation.  There  are,  however,  serious 
limitations  to  both  of  these  plans.  Corporations  cannot  issue  bonds  except 
within  the  limits  of  their  charter  or  the  general  law.  If  attempts  are  made 
to  extend  such  powers,  the  ratepayers  are  very  apt  to  initiate  opposition. 
With  regard  to  taxation  the  same  objection  would  apply  in  even  stronger 
form.  Nothing  provokes  more  determined  opposition  than  undue  increase 
of  taxation. 

The  only  mode  left  under  such  circumstances  is  a  considerable  re- 
trenchment of  expenditure;  but  that,  too,  is  a  very  difficult  process,  as 
anyone  connected  with  municipal  matters  knows  well. 

A  banker  therefore  who  has  incautiously  allowed  his  advances  to  drift 
into  this  position  may  have  the  mortification  of  finding  it  impossible  to 


142  BANKING    AND    COMMERCE. 

collect  for  years  tlie  amount  due,  and  of  being  under  the  necessity  of 
curtailing  advances  to  mercantile  customers.  All  that  has  been  observed 
with  regard  to  this  matter  is  founded  on  actual  experience. 

The  total  amount  which  a  municipal  corporation  may  prudently  bor- 
row, that  is  in  a  permanent  form,  is  a  question  on  which  different  opinions 
may  be  and  have  been  entertained.  It  generally  resolves  itself  into  a 
question  of  so  much  per  capita  of  population.  But  here  distinctions  must 
be  made.  For  some  municipalities  are  so  much  wealthier  than  others,  as 
a  whole,  that  an  amount  per  capita  that  would  be  a  serious  burden  to  one 
would  rest  lightly  upon  another.  But  the  limit  of  safety  will  be  found, 
as  a  rule,  to  lie  between  sixty  and  eighty  dollars  per  capita:  the  former, 
let  us  say,  in  the  case  of  a  municipality  having  a  considerable  population 
of  artisans,  and  the  latter  where  a  much  larger  percentage  consists  of  the 
well-to-do  class;  such,  for  example,  as  towns  resorted  to  for  the  purposes 
of  health  or  recreation,  or  which  are  agreeable  places  of  residence  for 
persons  of  competence.  Suburban  towns  within  reach  of  a  great  city 
can  bear  a  higher  rate  of  debt  per  capita  than  many  others;  but  there 
have  been  on  this  Continent  (but  not  in  Canada)  some  striking  instances 
of  extravagance  in  such  places  under  the  regime  of  an  enterprising 
mayor  or  council,  when  new  streets,  squares  and  boulevards  were  made  in 
advance  of  population,  burdening  the  existing  inhabitants  to  such  an 
extent  that  the  taxes  became  intolerable,  and  compelled  many  of  them  to 
leave  the  place  altogether.  Thus  the  expenditure  defeated  its  object. 
Population,  instead  of  being  attracted,  was  driven  away,  so  that  those 
who  had  property  in  the  place  and  could  not  leave  were  compelled  to 
allow  the  bonds  of  the  corporation  to  go  into  default.  Under  such  a  cloud 
as  this  an  attractive  municipality  might  lie  for  years,  its  bonds  becoming 
for  a  time  almost  worthless  imtil  some  forced  arrangement  was  made  with 
creditors  that  lightened  the  burden  of  taxation,  and  enabled  the  natural 
advantages  of  the  locality  to  assert  themselves  and  bring  in  population. 

Such  a  state  of  things  as  this  would  scarcely  arise  until  the  municipal 
debt  had  increased  to  more  than  a  hundred  dollars  per  capita. 

Sometimes,  in  a  large  and  prosperous  city,  under  the  regime  of  an 
enterprising  board  of  aldermen,  great  works  of  improvement  would  be 
planned  and  carried  out  year  after  year  that  added  nothing  to  the 
revenue  of  the  city,  while  they  added  immensely  to  the  burden  of  taxation. 
Such  expenditures  might  at  length  become  so  serious  as  to  arouse  organ- 
ized resistance  on  the  part  of  the  property-holders,  and  appeals  to  the 
Legislature  to  limit  the  borrowing  power  of  the  municipality.  Under 
circumstances  such  as  these,  if  a  bank  went  on  making  advances  on  open 
account,  there  might  be  danger  of  such  advances  being  declared  to  be 
beyond  the  limit  of  the  law,  and  considerable  difficulty  might  arise  as  to 
liquidation. 

The  above  observations  as  to  the  limit  within  which  the  debt  of  a  muni- 
cipality should  be  kept  are  of  course  irrespective  of  expenditures  of  a 
remunerative  character.      If  a  municipality  borrows  for  the  purpose  of 


LOANS  AND  ADVANCES  TO  GOVERNMENTS.    143 

acquiring  water-works,  or  other  revenue-producing  property,  it  may  safely 
exceed  the  limit  laid  down  herein,  always  on  the  supposition  that  the 
price  paid  for  the  same  be  such  that  the  revenue  will  meet  the  interest 
and  provide  a  sinking  fund  in  addition. 

But  experience  shows  that  a  municipality  has  always  a  tendency  to 
manage  such  works  less  economically  than  a  private  company  would; 
hence  there  is  a  constant  danger  that  revenue  may  be  insufficient,  and 
ordinary  taxation  resorted  to  for  meeting  the  deficiency. 

The  banker  of  a  corporation  needs,  therefore,  under  all  circumstances 
to  keep  a  close  eye  upon  its  financial  management.  And  he  may  render 
essential  service  to  the  citizens  by  imposing,  when  needed,  stringent 
checks  upon  borrowing.^** 

48  Nothing  in  this  chapter  need  prevent  advances  to  a  corporation  pending  the 
sale  of  a  duly  authorized  issue  of  bonds,  on  the  strict  agreement  that  such  ad- 
vances shall  be  liquidated  out  of  the  proceeds  of  the  bonds.  A  banker  in  such 
cas-es  may  act  as  intermediary  in  the  matter  and  have  the  bonds  in  his  own  pos- 
session until  a  sale  is  effected.  In  all  such  cases  it  is  desirable  that  a  separate 
account  be  opened,  so  as  to  prevent  these  extraordinary  advances  from  becoming 
mixed  with   those  that  are  of  an  ordlnar>-  character. 


CHAPTER   XIX. 

LOANS  ON  STOCKS  AND  BONDS. 

Growth    of    This    Branch    of    Leading — Call    Loans — Loans    on 
Time. 

THIS  branch  of  banking  loans  has  come  into  great  prominence  of  late 
years  on  both  sides  of  the  Atlantic,  owing  to  the  increasing  difficul- 
ty of  obtaining  satisfactory  commercial  loans  and  discounts.  The 
immense  increase  in  the  deposits  entrusted  to  Canadian  banks  has  more  than 
kept  pace  with  the  increase  of  satisfactory  commercial  business;  hence,  with 
many  banks,  the  larger  ones  especially,  it  has  become  a  regular  branch 
of  business  to  make  advances  on  the  security  of  bonds  and  stocks ;  not  that, 
as  a  rule,  they  have  deliberately  passed  by  commercial  business  in  order 
to  enter  upon  this  branch.  No  bank  has  a  right  to  do  this,  for  the  very 
object  for  which  banks  are  chartered  is  to  promote  trade  and  commerce. 
It  is  only  when  this  requirement  is  fulfilled  that  banks  can  fairly  enter 
upon  this  other  field  of  enterprise.  To  put  it  in  one  word:  it  is  only  the 
banker's  spare  funds  that  can  be  properly  so  emjjloyed.  The  amount  of 
such  spare  funds  varies  with  the  course  of  business  and  the  season  of  the 
year;  but,  generally  speaking,  there  is  always  sufficient  to  engage  some 
measure  of  a  banker's  attention,  and  to  make  it  important  that  he  should 
master  the  principles  on  which  loans  should  be  carried  on. 

There  are  two  very  important  differences  in  this  class  of  business, 
usually  expressed  by  the  term,  "loans  at  call,"  or  "loans  on  time."  There 
is-  also  a  distinction  between  "loans  on  bonds"  and  "loans  on  stocks." 

Loans  on  Call. 

By  far  the  larger  part  of  these  are  secured  by  stocks,  of  which  there 
is  in  Canada  a  comparatively  small  range  to  choose  from.  Loans  on 
bank  stocks  have  been  prohibited;  for,  when  permitted,  they  gave  rise 
to  dangerous  speculation.  There  remains,  therefore,  only  the  stocks  of 
railways,  shipping  companies,  and  industrial  enterprises.  A  banker  in 
dealing  with  these  will  do  well  to  make  it  a  rule  to  lend  on  no  stock  that 
is  not  listed  and  regularly  quoted.  He  will  require  as  a  minimum  a 
margin  of  ten  per  cent.,  but  the  higher  the  price  the  larger  percentage 
of  margin  he  will  exact.  In  fact,  when  a  stock  is  obviously  inflated,  he 
will  do  well  to  fix  a  definite  limit  to  his  advances,  no  matter  how  high  the 
stock  may  be  quoted.  This  is  a  cardinal  rule,  and  it  will  be  found  very 
dangerous  to  depart  from  it.  He  will  be  careful  to  have  a  substantial 
borrower,  and  avoid  dealing  with  impecunious  speculators,  no  matter 
how  good  the  security  may  seem  to  be.     And  he  will  keep  his  eye  upon 

Hi 


LOANS    ON    STOCKS    AND    BONDS.  145 

the  fluctuations  of  the  market,  and  take  means  to  keep  well  informed  of 
the  doings,  speculations,  and  schemes  of  the  principal  operators.  He 
will  do  well  to  observe  certain  rules  or  traditions,  the  result  of  experience, 
which,  when  applied,  will  rule  out  wrong  classes  of  securities  altogethei. 
The  greater  part  of  call  loans  will  be  to  stock  brokers.  Loans  to  them 
are  prima  facie  safer  than  to  principals,  for  the  reason  that  they  them- 
selves have  a  principal  behind  them  on  whom  they  can  call  if  needful.  A 
banker  dealing  with  brokers  is,  therefore,  almost  in  a  position  of  having 
a  double  security,  besides  the  stock  itself.  A  banker  will  take  care  to 
have  his  risks  well  distributed,  not  only  amongst  persons,  but  amongst 
stocks.  He  will  take  care  not  to  have  too  much  loaned  on  any  one 
stock,  otherwise  he  may  find  to  his  annoyance  that  he  has  been  a  party 
to  some  scheme  for  inflating  a  stock  beyond  a  reasonable  value.  He  may 
then  be  caught  in  a  reaction,  and  find  that  he  has  locked  up  his  money, 
instead  of  having  it  at  his  disposal  on  a  day's  notice.  In  a  limited  market 
like  that  of  Canada,  a  banker  will  need  to  be  careful  not  to  have  too 
much  money  out  upon  it.  Experience  has  proved  that  this  market  cannot 
stand  any  very  heavy  strain  of  calls  for  money,  especially  on  stocks 
that  have  a  local  value  only. 

Some  stocks  there  are  on  which  money  can  always  be  obtained  in  New 
York  or  London.  These,  of  course,  can  bear  a  much  heavier  strain  of 
call  than  the  rest.  But  if  advances  rest  on  stocks  that  are  not  known  in 
New  York  or  London,  the  calling  in  of  loans  may  sometimes  result  as 
"the  calling  of  spirits  from  the  vasty  deep"  by  the  Welsh  bard  was  said 
to  do. 

But  much  of  the  money  lent  on  call  by  Canadian  banks  is  through 
offices  in  New  York.  There  the  field  is  immensely  greater.  There  is  a 
much  greater  variety  of  quoted  stocks,  the  changes  in  which  are  known 
far  more  rapidly  than  is  the  case  in  Canada.  There  are  large  numbers  of 
brokers  of  solid  means  and  standing,  who  are  well  able  to  stand  the 
changes  and  even  shocks  of  the  market,  as  has  been  repeatedly  proved. 
The  tone  of  honor  amongst  this  class  is  high.  If  calls  for  money  are 
made,  it  is  a  point  of  honor  to  respond  at  once;  and  if  the  call  is  for 
more  margin,  it  is  at  once  lodged.  No  complaint  is  ever  made  either  of 
the  suddenness  or  the  amount  of  any  call;  or  even  of  the  sale  of  stock  in 
case  the  call  is  not  responded  to — a  rare  event,  however. 

The  great  objection  to  the  New  York  market  is  the  rapid  changes 
in  the  rate  for  money,  and  the  fact  that  the  rate  may  be  as  low  as  two  to 
three  per  cent,  for  months  together.  Then,  in  a  remarkably  short  time, 
the  market  may  assume  such  a  condition  that  rates  of  ten,  fifteen,  or 
even  twent}'-  per  cent,  per  annum  are  paid  without  grumbling.  This  state 
of  the  market,  however,  rarely  lasts  more  than  a  few  days,  or  a  few  weeks 
at  most;  and,  during  its  continuance,  a  vast  amount  of  clearing  out  of 
weak  speculators  usually  takes  place. 

The  New  York  market,  as  is  well  known,  is  occasionally  visited  by 

10 


OF  THE 


UNIVERSIXX 


116  BANKING    AND    COMMERCE. 

spasms  and  cataclysms.  Memories  of  "Black  Fridays"  still  linger  about 
Wall  Street  (as  indeed  they  do  about  Lombard  Street),  but  these  spasms 
are  not  so  common  now  as  formerly.  They  depend  partly  upon  the 
money  market  itself.  A  continued  period  of  very  tight  money  will  result 
in  sharp  spasmodic  movements  in  which  a  fall  of  twenty  to  thirty  per  cent 
(or  even  more  in  some  cases)  will  take  place  along  the  whole  line  of 
stocks  in  a  single  day.  Yet  so  solid  is  the  underlying  stratum  that  it 
has  been  known  again  and  again  that  banks  having  large  sums  out  "at 
call"  have  found  themselves  at  the  end  of  a  most  convulsive  day  in  just 
as  good  a  position  as  at  the  beginning.  Their  calls  for  margin  or  for 
payment  had,  in  every  case,  been  responded  to,  and  not  a  single  failure 
occurred  amongst  the  circle  of  their  customers. 

Loans  on   Time. 

The  principal  point  of  difference  between  call  and  time  loans  is  that 
the  latter  are  more  nearly  analogous  to  the  ordinary  loaning  operations 
of  the  bank,  and  are  not  a  mere  employment  of  funds  that  may  be  wanted 
at  any  time,  and  must  be  at  command  on  a  day's  notice. 

A  banker  who  is  purposing  to  make  loans  on  time  will  consider 
whether  the  prospective  state  of  his  finances  warrants  this  mode  of  em- 
ploying his  funds.  He  will  also  scrutinize  the  security  more  carefully 
and  avoid  such  stocks  as  have  a  tendency  to  considerable  fluctuations 
during  a  given  course  of  months.  It  has  happened  to  a  lender  of  money 
on  time,  that  circumstances  transpired  making  it  most  desirable,  and  in- 
deed necessary  for  safety,  to  call  in  the  loan.  But  being  precluded 
from  doing  this,  he  was  compelled  to  allow  it  to  run  on  and  so  to  submit 
to  a  loss.  Loans  on  time  are  often  advantageous  to  a  banker  with  whom 
money  is  plentiful,  %vhen  the  rate  he  can  command  is  good.  He  is  saved 
from  the  trouble  attendant  on  the  constant  changes  involved  in  dealing 
with  call  loans,  and  will  sometimes  have  the  satisfaction  of  having  his 
funds  out  at  a  higher  rate  than  call  loans  are  bringing.  Of  course,  his 
experience  may  be  the  contrary. 

There  is  one  fundamental  rule  which  experience  has  suggested  in 
dealing  with  loans  on  stocks,  viz.,  that  it  is  never  desirable  to  lend  direct 
to  the  promoter  of  a  company  or  to  the  man  who  owns  and  controls  the 
majority  of  the  stock  in  it. 


CHAPTER    XX, 
THE  DISCOUNTING  OF  TRADE  BILLS. 

Definition  of  Thade  Bills — Discounting  with  More  Than  Onb 
Bank — Bills  upon  Branches  of  the  Same  House — Bills  of 
Selling  Agents — Bills  of  Wholesalers  on  Retailers — Bills 
of  Manufacturers  on  Merchants. 

TRADE  bills  ordinarily   (though  there  are  other  classes)   are  repre- 
sentatives of  sales,  and  arise  at  the  point  where  a  bargain   for 
purchase  of  a  commodity  has  been  consummated,  and  the  property 
ia  it  has  passed  to  the  purchaser,  who  has  given  a  written  promise  to 
pay  for  if.     That  promise  to  pay,  in  accordance  with  universal  modern 
practice,  is  written  on  a  brief  document  called  variously  a  Jiote  or  a  bill. 

Sometimes  the  promise  is  in  the  form  of  an  acceptance  of  an  order 
or  direction  to  pay.  It  is  then  called  a  bill.  But  when  it  is  a  simple 
promise  to  pay,  it  is  called  a  note,  or  more  definitely,  a  promissory  note. 

These  distinctions,  however,  are  principally  matters  of  form.  The 
essence  of  all  such  documents,  when  legitimate  and  regular,  is  that 
certain  goods  have  been  bought,  and  that  the  purchaser  has  given  written 
engagement  to  pay  for  them. 

Now,  when  such  documents  arc  what  they  purport  to  be,  and  are 
given  for  value  received  (these  words  being  of  the  essence  of  the  bona 
fides  of  the  document  though  not  of  its  legality),  the  business  of  a  banker 
in  dealing  with  one  of  them  is  comparatively  simple.  He  has,  in  the 
first  place,  to  be  satisfied  that  the  signature  of  the  maker  or  acceptor 
of  the  document  is  genuine.  If  the  maker  or  acceptor  is  an  officer  of  a 
company,  he  is  bound  to  enquire  whether  he  has  authority  to  bind  his 
employers  by  his  signature.  Being  satisfied  on  the  point,  he  will  next 
scrutinize  the  document  to  see  whether  it  is  drawn  out  in  accordance  with 
the  law.  For  the  law  in  respect  of  these  simple  looking  documents  is 
more  precise  and  more  elaborate  than  it  is  with  regard  to  almost  any 
other  documents  involving  a  contract. 

Byles  on  Bills  of  Exchange  is  a  well  known  handbook.  Yet,  though 
containing  hundreds  of  pages,  it  is  so  far  from  exhausting  the  subject 
that  hundreds  of  cases  have  been  argued  and  decided  since  it  was  written, 
the  record  of  which  would  occupy  many  volumes  more.  The  subject 
appears  to  be  unfathomable,  for  new  cases  are  constantly  arising  involv- 
ing new  considerations,  based  on  new  sets  of  facts,  and  demanding,  if 
not  new  laws,  new  a})plications  of  those  already  existing. 

The  more  abstruse  points  connected  with  notes  and  bills  are  matters 
for  the  consideration  of  a  lawyer  alone,  and  a  banker,  if  he  is  wise,  will 

147 


14S  BAXKING    AND    COMMERCE. 

let  his  solicitor  deal  with  them.  But  there  are  certain  general  principles 
which  every  banker  ought  to  have,  so  to  speak,  "at  his  fingers'  ends," 
viz.,  that  the  document  shall  not  have  been  altered  in  any  essential  point; 
that  is,  as  to  amount,  or  date,  or  time,  or  the  person  to  whom  it  is  payable, 
or  the  person  who  promises  to  pay;  also  that  it  promises  to  pay  a  specif c 
amount  at  a  specified  time,  and  without  any  conditions;  also  that  it  is 
properly  endorsed.  All  these  are  of  the  essence  of  the  document.  It  is 
not  a  bill  that  can  be  sued  on  by  a  banker  if  there  is  a  failure  in  one  of 
these  respects,  although  the  seller  of  the  goods  would  always  have  the 
right  to  recover  on  his  contract. 

But  a  bill  may  be  made  in  perfect  accordance  with  the  law,  and  the 
person  who  brings  it  to  the  bank  may  have  a  perfect  right  to  transfer  it, 
and  yet  it  may  not  be  a  desirable  document  for  him  to  discount.  The 
person  promising  may  not  be  what  is  generally  called  "good"  for  its 
amount;  which  brings  up  once  more  a  commercial  question  whether  the 
seller  of  the  goods  was  wise  in  selling  him  so  large  an  amount  on  credit 
as  he  has  done. 

It  is  a  banker's  business  to  keep  informed  as  to  the  whole  series  of 
bills  made  by  any  one  promissor  standing  in  his  books,  to  keep  the  total 
in  mind,  and  to  consider  not  the  single  document  presented  to  him  at 
any  one  time,  but  the  amount  of  the  whole  of  the  bills  made  by  this  one 
person  or  firm  that  may  be  afloat.  And  this  brings  up  another  point  of 
vital  importance,  viz.,  whether  the  bank's  customer  keejis  more  than  one 
bank  account.  For  in  that  case  the  banker  will  need  to  keep  himself 
informed  of  the  amount  of  bills  made  by  the  same  party  that  are  domi- 
ciled in  another  institution.  Want  of  consideration  on  this  point  will 
result  in  constant  misconception. 

Let  us  suppose,  for  argument's  sake,  that  the  amount  of  the  bills  of 
a  certain  promissor  in  his  own  office  is  $2,000.  That  figure  will  be  before 
him  whenever  a  reference  is  made  to  the  bills  of  the  party.  He  will 
recall  the  information  he  has  on  record  respecting  him,  and  applying 
that  information  to  this  specific  amount  will  exercise  his  judgment  ac- 
cordingly. 

But  if  the  merchant  who  offers  the  paper  has  another  discount 
account,  he  will,  in  all  probability,  oiFer  the  paper  of  the  same  customer 
in  that  quarter  also. 

Thus  the  very  basis  of  a  banker's  judgment  will  be  a  misconception. 
For  he  is  thinking  of  a  credit  of  $2,000 ;  whereas,  he  ought  to  be  thinking 
of  some  larger  sum,  viz.,  $3,000,  or  $5,000,  or  even  more;  and  may  awake 
to  the  true  condition  of  things  only  when  he  is  prevented  from  applying 
a  remedy.  For  his  own  customer,  i.  e.,  the  wholesale  merchant,  may  fail, 
and  his  failure  be  due  to  the  fact  of  his  having  given  too  much  credit. 
Then,  for  the  first  time,  the  banker  realizes  the  true  position.  The 
retailer  who  was  considered  perfectly  good  for  $2,000  is  found  quite 
unable  to  pay  $5,000  or  $10,000,  and  the  merchant  who  has  been   con- 


THE    DISCOUNTING    OF    TRADE    BILLS.  119 

sidered  prudent  in  crediting  the  retailer  $2,000  is  discovered  to  have  been 
rash  and  imprudent  in  trusting  him  double  or  treble  the  amount. 

The  question  therefore  of  what  is  called  in  banking  phrase  "a  divided 
account"  is  of  the  first  importance  in  connection  with  the  discount  of  cus- 
tomers' bills.  It  is  even  of  more  importance  in  connection  with  loans  of 
money. 

In  a  banking  system  like  that  of  Canada,  where  branches  are  estab- 
lished at  many  points,  a  banker  has  also  to  consider  whether  his  cus- 
tomer is  carrying  on  business  in  more  than  one  centre,  and  keeping  a 
discount  account  at  some  other  branch  of  his  own,  or  some  other  bank. 
This,  of  course,  is  a  matter  for  the  consideration  of  those  who  from  the 
head  office  of  the  bank  have  supervision  over  what  is  going  on  at  the 
branches.  But  in  general  it  may  be  said  that  it  is  not  desirable  for  a 
customer  to  have  a  discount  account  at  more  than  one  branch,  though 
he  may,  of  course,  keep  another  deposit  account.  And  it  is  very  unde- 
sirable, as  a  rule,  for  a  customer  who  carries  on  business  in  two  places  to 
have  bills  discounted  for  him  drawn  upon  his  own  firm  in  another  centre 
of  business.  It  is  common,  in  these  days,  for  large  houses  to  establish 
branches  or  agencies  in  other  cities;  and  it  appears  as  natural  at  times 
for  the  central  establishment  to  draw  bills  upon  the  branch  representing 
goods  shipped  to  it  as  for  it  4:o  draw  bills  upon  the  purchasers  of  goods. 
But  consideration  will  show  that  there  is  an  essential  difference  between 
the  two  cases.  In  the  one  there  is  an  actual  transfer  of  property  to  an 
independent  party,  whose  obligation  to  pay  is  a  distinct  contract;  while 
in  the  other,  the  goods  are  only  transferred  from  one  warehouse  to 
another,  the  obligation  of  the  keepers  of  the  second  warehouse  adding  no 
strength  whatever  to  the  bill.  The  paper  thus  created  differs  in  no  wise 
from  that  which  might  arise  if  a  firm  had  two  warehouses  in  different 
streets  of  a  city,  and  one  warehouse  drew  bills  upon  the  other. 

All  such  paper  will  be  classed  by  an  intelligent  banker  not  amongst 
his  trade  bills,  but  as  loans  without  security.  Such  loans  may  be  good 
or  otherwise  according  to  circumstances,  but  the  documents  are  not  trade 
bills. 

But  now,  supposing  the  bill  to  be  genuine,  as  bearing  the  real  or 
duly  authorized  signature  of  the  parties  to  it,  and  that  it  be  properly 
drawn  in  accordance  with  law,  the  banker,  bearing  in  mind  the  total ' 
amount  that  he  is  asked  to  discount  of  the  same  person,  will  have  before 
him  the  fundamental  question,  whether  the  maker  of  the  bills  can  be 
relied  on  to  pay  them.  To  the  settlement  of  this  question  a  banker  wiU 
bring  all  the  information  at  his  command  from  outside  sources,  aided  by 
his  own  experience  of  the  same  name  in  the  course  of  an  account,  or  in 
that  of  other  persons.  It  not  infrequently  happens  that  a  purchaser  of 
commodities  may  deal  with  several  houses  in  the  same  trade,  all  of  whom 
keep  accounts  in  the  one  bank,  either  at  the  head  office  or  at  some  of  the 
branches.      The  banker  has  thus  a  somewhat  wide  range  of  experience 


1-0  BANKING    AND    COMMERCE. 

and  information  at  his  command.  A  large  Scotch  bank  may  have  a 
mercantile  account  in  Glasgow,  and  discount  thereat  the  bills  of  traders 
in  dift'ercnt  towns  of  the  interior.  But  some  of  these  traders  may  buy 
goods  also  in  London,  and  their  bills  may  be  offered  at  the  London  office 
of  the  same  bank.  Thus,  from  two  sources  the  bank  can  form  a  judgment 
as  to  the  quality  of  the  bills.  The  same  principle  will  apply  to  cities  in 
Canada,  for  it  is  common  there  also  for  retail  traders  to  make  purchases 
in  more  than  one  centre  of  wholesale  trade.  Thus,  their  bills  may  come 
under  the  review  of  a  banker  in  any  one  of  the  centres  where  the  head 
offices  of  banks  are  situated. 

The  same  custom  of  buying  from  wholesale  houses  in  other  cities 
doubtless  prevails  in  the  United  States.  But  American  bankers  have  not 
the  same  facilities  for  discovery  that  the  bankers  of  Canada  have. 

Almost  every  large  wholesale  firm  has  a  circle  of  customers  who,  for 
various  reasons,  deal  almost  exclusively  with  it.  The  bills  given  by  this 
class  of  customers  will  swell  up  to  a  much  larger  total  than  those  of  the 
average  trader,  and  the  attention  of  the  banker  will  very  naturally  be 
given  to  them  with  corresponding  care.  For  experience  shows  that  the 
line  of  credit  given  by  a  wholesale  merchant  to  a  retailer  of  this  class  is 
very  apt  to  be  abused. 

The  retailer  gradually  acquires  the  habit  not  only  of  buying  his  goods 
from  the  merchant,  but  of  leaning  upon  him  financially,  looking  to  him 
for  help  in  emergencies,  expecting  help  when  he  has  not  the  wherewithal 
to  meet  his  bills;  in  fact,  practically  making  the  merchant  his  banker. 
In  such  cases  it  is  not  uncommon  for  a  merchant  to  hold  security,  which 
security  may,  or  may  not,  be  strictly  applicable  to  the  paper  held  by  the 
bank.  Such  security  may  be  for  an  open  account,  or  a  balance  due  over 
and  above  the  notes  given  for  goods,  in  which  case  the  banker  would 
derive  no  benefit  from  it  in  case  of  failure. 

When  the  amount  of  a  retail  customer's  paper  swells  up  beyond  the 
average,  it  will  always  be  wnse  for  a  banker  to  ascertain  what  is  his 
total  indebtedness  to  the  merchant;  and,  supposing  he  has  given  security, 
what  is  the  nature  of  it,  and  the  terms  on  which  it  has  been  given.  And 
if  an  account  begins  to  show  unfavorable  features,  it  may  be  desirable 
to  have  the  security  transferred. 

It  is  in  connection  with  customers*  paper  of  this  kind  that  the  danger 
of  a  divided  account  becomes  manifest.  For,  in  that  case,  it  is  certain 
that  the  bills  of  the  customers  who  owe  the  largest  amounts  will  be 
divided  between  two  or  more  banks.  The  result  is  that  an  excessive 
credit  is  apt  to  be  concealed  or  overlooked.  The  banker,  having  before 
him  a  statement  of  the  account  of  a  certain  customer,  may  not  notice 
what  he  would  consider  an  excessive  amount  under  one  name.  And 
though  he  may  have  been  informed  that  there  is  another  bank  account, 
he  does  not  always  recollect  at  the  moment  that  the  amount  he  has  before 
him  is  not  the  true  total.     But  if  the  whole  of  the  paper  of  the  retailer 


THE    DISCOUNTING    OF    TRADE    BILLS.  151 

were  in  his  own  hand,  he  would  at  once  be  struck  with  the  amount  as 
excessive,  and  take  measures  accordingly.  He  would  almost  certainly 
have  refused  to  discount  so  large  an  amount  of  paper  at  all,  and  thus 
have  rendered  his  customer  essential  service.  Or  if  inadvertently  so 
large  an  amount  had  been  allowed  to  creep  in,  he  would  require  reduction 
or  security,  putting  the  customer  on  his  guard  by  such  action,  and 
indicating  to  him  that  the  account  of  his  debtor  was  becoming  dangerous. 
When  a  wholesale  firm  has  failed,  the  failure  has  often  been  brought 
about  by  excessive  credit  given  to  a  small  number  of  customers  whose 
paper  has  been  distributed  between  two  or  three  banks. 

Remarkable  instances  of  this  kind  have  been  known  in  the  experience 
of  Canadian  banks.  The  failure  of  a  wholesale  firm  has  revealed  more 
than  once  an  amount  of  credit  as  having  been  given  to  certain  retailers 
that  was  simply  appalling,  and  which  could  never  have  happened  if 
all  the  bills  had  been  domiciled  with  one  banker.  The  same  danger  arises 
in  the  United  States  when  bills  are  sold  to  bill  brokers  in  New  York, 
as  well  as  discounted  at  a  merchant's  own  bank. 

The  discounting,  then,  of  customers'  bills  by  a  banker  is  not  so  simple 
a  matter  as  might  be  supposed. 

The  note,  say,  of  John  Thompson  to  McGregor  &  Co.  for  $500 
may  seem  to  be  a  good  bill,  and  the  risk  of  discounting  it  a  mere  nothing. 
But  if  the  banker  has  already  discounted  Thompson's  paper  to  the  same 
firm  for  $5,000,  the  question  whether  he  shall  take  $500  more  is  a 
different  affair.  If  the  banker  has  also  in  his  bill-case,  Thompson's 
paper  to  Williamson  &  Co.,  the  affair  is  more  complicated  still.  If  in 
addition,  McGregor  &  Co.  keep  an  account  with  another  bank,  and  have 
under  discount  there  more  of  Thompson's  paper,  amount  not  known,  the 
question  of  the  $500  note  has  an  aspect  that  a  casual  glance  does  not 
begin  to  reveal.  Still  further,  if  in  addition  to  all  the  notes,  the  banker 
is  aware  that  McGregor  &  Co.,  and  probably  Williamson  &  Co.  as  well, 
have  an  open  account  against  Thompson,  the  considerations  with  regard 
to  that  one  note  may  well  be  of  such  a  character  as  to  make  him  take  a 
long  time  to  deliberate  about  it. 

Yet  this  is  a  fair  si^ecimen  of  the  manner  in  which  much  of  the 
discounting  of  customers'  paper  has  to  be  conducted.  In  every  case,  the 
consideration  has  to  be  of  the  total  amount  of  the  same  name  in  the 
banker's  possession,  then  of  the  position  of  the  maker,  then  that  of  the 
iiierchant  himself,  then  of  the  total  amount  of  the  latter's  whole  discount 
line;  and  also,  if  he  is  known  to  have  more  than  one  account,  the  amount 
and  character  of  the  liability  under  that. 

It  might  be  thought  that  if  such  complicated  considerations  present 
themselves  with  regard  to  every  note  offered,  the  time  necessary  to  com- 
prehend them  would  prevent  any  discounting  being  done  at  all.  But  a 
banker  who  understands  his  business  and  gives  close  attention  to  it, 
acquires  a  sort  of  instinct,  which,  aided  by  accurate  information  periodi- 


152  EAXKIXG    AND    COMMERCE. 

oally  placed  before  him,  enables  him  to  deal  with  such  matters  promptly 
and  without  wasting  either  the  customer's  time  or  his  own. 

But  such  a  habit  of  close  attention  is  absolutely  necessary  to  efficiency, 
and  not  less  is  the  habit  of  constantly  consulting  his  records  and  of 
srranging  the  summaries  of  his  customers'  discounts  so  that  he  may  be 
able  at  a  glance  to  see  how  each  of  them  stands,  and  how  much  paper  of 
each  retailer  is  generally  offered  by  mercantile  customers. 

The  foregoing  observations  largely  refer  to  the  notes  generally 
offered  by  importing  merchants.  But  when  such  merchants  have  estab- 
lished a  character  for  prudence  and  attention  to  business,  and  are  known 
to  have  sufficient  capital,  it  is  common  for  the  banker  to  "pass"  such 
paper  as  is  offered  without  special  scrutiny  of  the  names  at  the  time. 
Indeed,  it  may  fairly  be  said  that  a  merchant  has  never  established  him- 
self on  a  proper  footing  with  his  banker  until  the  bills  he  offers  can  be 
passed  at  once.  This,  however,  can  only  be  the  case  where  a  bank  has 
the  whole  account. 

But  for  all  that,  the  paper  will  come  under  periodical  review,  and  a 
judgment  will  be  passed  upon  the  names  which  compose  it,  in  those  sum- 
marized statements  which  are  presented  to  the  banker  by  his  officers, 
which  statements  are  almost  of  as  much  importance  to  him  as  the  compass 
is  to  the  captain  of  a  ship. 

There  are  other  classes  of  trade  bills  than  these,  such,  namely,  as 
arise  in  connection  with  manufacturing  industries  and  require  to  be 
judged  by  different  rules.  The  relation  between  a  manufacturer  and 
the  purchaser  of  his  goods  is  often  of  an  entirely  different  character 
from  that  of  a  wholesale  merchant  and  the  retailer. 

In  transactions  between  a  wholesale  merchant  and  a  retailer  the 
former  is  generally  the  more  important  person.  But  when  the  manufac- 
turer sells  to  the  wholesale  merchant,  it  is  not  infrequently  the  case  that 
the  purchaser  has  a  far  larger  capital  than  the  seller. 

Included  in  the  category  of  manufacturers  is  the  large  class  of  owners 
or  operators  of  flouring  mills  and  saw  mills;  though,  as  has  been  ob- 
served, they  are  sometimes  not  thought  of  as  manufacturers  at  all. 

Many  of  these  mills  are  small  concerns,  yet  they  occupy  a  most  useful 
place  in  the  industrial  development  of  the  country.  Such  as  these  will 
have  as  purchasers  the  large  merchants  of  central  cities,  whose  reputed 
wealth  and  standing  give  them  a  position  much  beyond  the  persons  from 
whom  they  buy. 

The  bills  of  houses  of  this  kind  are  generally  esteemed  by  bankers 
as  of  a  choice  character;  for  they  are,  as  a  rule,  short,  and  as  a  rule, 
paid  at  maturity.  If  a  wliolesale  merchant  were  to  desire  a  renewal  of 
any  of  his  obligations,  his  credit  would  be  impaired  at  once. 

The  bills  drawn  by  a  saw  miller  in  Canada  u]j()ii  lumber  houses  in  the 
United  States  are  often  of  a  high  quality,  yet  a  banker  will  need  to  kee}) 


THE    DISCOUNTING    OF    TRADE    BILLS.  153 

himself  advised  from  time  to  time,  and  especially  from  season  to  season, 
of  the  operations  of  such  houses. 

The  bills  of  woolen  and  cotton  mills  upon  dry  goods  and  clothing 
houses  are  of  the  same  class  as  the  last.  They,  as  a  rule,  are  promptly 
paid,  for  the  reason  just  assigned.  In  fact,  their  regular  payment  is 
sometimes  the  reason  why  a  banker  is  deceived  by  them.  The  wholesale 
merchant  must  pay  his  obligations  promptly  or  stop  payment  altogether. 
Thus,  when  such  a  house  does  stop  payment,  it  is  usually  without  any 
premonitory  symptoms,  such  as  the  asking  for  renewals,  or  letting  an 
acceptance  occasionally  be  dishonored. 

Bills   Drawn   Against  Consignments  of   Goods. 

There  is,  however,  a  class  of  bills,  which,  though  having  the  appear- 
ance of  customers'  paper,  and  being  generally  classed  as  such,  does  in 
reality  take  its  rise  from  different  circumstances  altogether. 

The  ordinary  trade  bill  represents  a  purchase  of  goods.  But  in  some 
cases,  as  has  been  shown  in  an  earlier  chapter,  a  selling  agent  is  em- 
ployed in  large  cities  who  receives  goods  as  a  purchaser  would  do,  and 
accepts  bills  against  them  in  favor  of  his  manufacturing  correspondent. 
These  bills  naturally  run  up  to  large  amounts;  in  fact,  to  the  whole  sum 
which  the  bills  of  a  number  of  purchasers  would  have  done  had  sales  been 
made  direct  to  them.  The  arrangement  saves  the  manufacturer  much 
labor,  for  instead  of  drawing  on  a  multitude  of  traders,  he  only  draws 
upon  a  single  agency  house. 

But  it  is  obvious  that  the  risk  is  heavy,  for  in  case  of  misfortune  to 
the  agent,  the  manufacturer  becomes  a  creditor  of  a  bankrupt  estate  to 
such  an  amount  that  he  may  be  landed  in  bankruptcy  himself.  These 
bills,  however,  are  of  an  exceptional  class,  for  the  property  in  the  goods 
against  which  they  are  drawn  has  not  passed  to  the  drawee. 

The  bills  drawn  by  a  flour  miller  or  pork  packer  upon  a  consignee 
against  goods  sent  for  sale  are  a  variety  of  the  same  class.  If  drawn 
against  merchandise,  a  banker  would  look  on  them  with  considerable 
favor,  objectionable  as  the  practice  of  consigning  is,  so  far  as  the  owner 
is  concerned.  But  it  is  not  uncommon  for  such  relations  to  be  established 
between  consignor  and  consignee  that  the  latter  will  sometimes  accept 
bills  before  goods  are  shipped,  and  for  this,  in  time,  to  degenerate  into  a 
practice  of  drawing  without  reference  to  merchandise  at  all.  When 
matters  have  arrived  at  this  shape,  it  may  be  assumed  that  both  jiarties 
are  pretty  far  on  the  way  to  insolvency.  Yet  the  consignor's  banker  may 
not  find  it  out  until  both  parties  fail,  and  the  true  character  of  the  paper 
is  revealed. 

The  only  safe  mode  of  dealing  with  bills  drawn  against  staples  like 
flour,  grain,  pork,  or  similar  articles  is  to  require  a  bill  of  lading  to  be 
attached  to  them.  This,  in  fact,  has  now  generally  come  to  be  the  case; 
the  only  question  being  whether  the  goods  shall  be  to  "order"  generally. 


154  BANKING    AND    COMMERCE. 

or  to  the  bank's  order,  or  to  the  order  of  the  purchaser  or  consignee. 
In  the  latter  case  the  bill  of  lading  gives  no  practical  security,  except 
to  insure  that  the  bill  is  drawn  against  merchandise.  In  the  two  former, 
the  purchaser  cannot  get  the  goods  without  the  bill  of  lading,  and  it  is 
for  the  banker  to  say  whether  he  will  give  it  up  on  acceptance  or  retain 
it  until  payment.  The  last  is  the  usual  course.  But  the  drawee  may 
refuse  to  accept,  in  which  case  the  bank  has  the  goods  as  security.  What 
he  shall  do  with  them  is  generally  a  matter  of  arrangement  with  the 
drawer. 

Accommodation  Bills. 

There  is,  however,  a  class  of  bills  which  have  generally  been  known 
by  the  appellation  of  "accommodation,"  but  which,  as  will  be  shown, 
ought  properly  to  be  designated  by  a  severer  epithet. 

For  such  bills,  as  a  rule,  are  the  expression  of  a  written  falsehood. 
It  is  not  essential  to  the  legality  of  a  bill  to  append  the  words  for  value 
received,  for  which  reason  the  words  are  not  found  in  every  bill  that  is 
drawn.  But  it  was  once  universal,  and  it  is  almost  universal  now.  The 
practice  is  founded  on  the  reason  of  things ;  viz.,  that  the  promise  to  pay, 
or  the  acceptance  of  an  order  to  pay,  should  be  a  warrant  to  any  man  who 
is  asked  to  give  cash  for  the  document,  that  a  genuine  transaction  is  at 
the  bottom  of  it.  That  the  maker  owes  the  money,  that  he  has  received 
value,  raises  a  strong  presumption  that  he  will  pay  the  bill.  This  is  the 
natural  order  of  things,  and  it  is  this  that  gives  a  value  to  the  bill  it 
would  not  otherwise  possess.  For  unless  the  maker  becomes  bankrupt, 
it  is  certain  he  will  endeavor  to  pay  the  bill.  But  if  he  does  not  owe  the 
money,  he  may  do  all  that  is  possible  to  avoid  payment.  Thus  the  words 
"for  value  received,"  though  not  essential  to  the  legality  of  the  bill,  are 
important  as  bearing  on  its  genuineness. 

It  consequently  follows  that  these  words,  if  used  on  a  bill  which  is 
not  founded  on  a  debt  owing  by  the  party  that  made  or  accepted  it,  are 
a  written  falsehood.  The  document  therefore  is  a  fraud.  Even  if  the 
words  are  not  there,  when  the  bill  has  the  form  and  outward  character 
of  a  bill  representing  a  business  transaction,  when  there  is  no  such  basis 
for  it,  the  bill,  if  passed  at  all,  will  be  passed  on  false  pretences. 

In  banking  practice  there  are  found  to  be  various  descriptions  of 
notes  of  this  kind,  which  differ  considerably  from  one  another. 

A  merchant,  for  example,  when  sales  are  slow,  and  bills  are  scarce, 
and  having  payments  impending  which  he  must  meet  or  lose  credit,  will 
sometimes  ask  one  of  his  customers  to  make  a  note  or  accept  a  bill  for 
a  larger  amount  than  he  owes.  In  this  case  the  merchant  will  probably 
promise  to  send  goods  at  a  future  day  to  cover  the  extra  amount.  The 
bill  will,  in  such  a  case,  be  partly  genuine  and  partly  fraudulent.  But 
the  words  for  value  received,  should  they  be  written  on  the  bill,  will  be 
wholly  false. 

Such   bills   as   these   are   pcrliaps   more   dangerous   than   those   which 


THE    DISCOUNTING    OF    TRADE    BILLS.  155 

liave  no  business  foundation  at  all.  It  is  almost  impossible  for  a 
banker  to  detect  the  fraudulent  element,  seeing  that  the  bill  is  made  by  a 
trader  known  to  have  dealings  with  the  house.  It  would  be  difficult  for 
a  merchant  to  obtain  such  a  bill  from  a  man  who  owed  him  nothing  at 
all;  and  if  he  did,  a  banker  would  more  easily  find  it  out.  If  such  a 
practice  therefore  is  entered  on,  it  is  generally  with  a  customer  who  has 
regular  dealings  with  the  house,  and  is  in  the  constant  habit  of  giving 
them  bills  in  settlement.  The  practice,  however,  is  a  very  dangerous  one 
for  the  merchant  himself.  The  single  instance  affords  so  ready  a  mode 
of  obtaining  money  that  there  is  a  constant  temptation  to  continue  it. 
Like  other  evil  habits,  this  is  apt  to  grow  by  indulgence,  it  may  therefore 
come  to  pass  that  there  is  a  constant  (but  fluctuating)  element  of  fraud 
in  the  whole  line  of  this  merchant's  discount.  If  indeed  the  merchant 
informed  his  banker  of  the  real  state  of  the  case;  if  he  advised  him, 
let  us  say,  that  of  the  bills  he  offered  for  discount  a  certain  amount, 
twenty  per  cent.,  thirty  per  cent.,  or  otherwise,  did  not  represent  business 
transactions,  he  would  be  relieved  from  the  charge  of  fraud.  But  we  can 
scarcely  conceive  of  the  merchant  having  the  coolness  to  do  it;  and  if  he 
did,  of  the  banker  being  simple  enough  to  go  on  discounting  the  bills. 
The  banker's  proper  reply  would  be  this:  if  you  have  need  of  more 
money  than  could  be  provided  by  genuine  bills,  let  me  know  the  amount 
you  want  and  whether  you  can  give  me  security  for  it;  and  if  security, 
what  security;  or  whether  you  want  me  to  make  a  temporary  advance 
without  security  at  all.  We  should  then  understand  one  another,  and  all 
would  be  fair  on  both  sides.  But  for  me  to  go  on  discounting  so-called 
<?onmiercial  bills  that  have  a  taint  of  fraud  in  them  would  be  to  become  a 
party  to  the  fraud  myself. 

There  arc,  however,  bills  of  this  character  which  have  the  element 
of  fraud  outright.  Bills  have  been  offered  to  banks  and  have  been  dis- 
counted to  considerable  amounts  which  rested  on  no  business  transac- 
tion whatever.  Commercial  firms  in  great  business  centers  having  high 
credit  and  standing  have  been  found  capable  of  concocting  and  carrying 
forward  for  years  schemes  of  deliberate  deception  with  their  bankers, 
like  the  following.  They  would  arrange  with  a  number  of  small  traders 
in  various  parts  of  the  country  to  accept  bills  drawn  upon  them,  although 
no  business  transactions  whatever  had  passed  between  them.  A  con- 
sideration was  given  in  such  cases;  and  the  bills  were  always  carefully 
seen  to  at  maturity  by  the  negotiating  house.  It  was  by  a  perfect  net- 
work of  arrangements  of  this  kind  that  the  great  wholesale  firm  of 
Macdonald  &  Co.,  of  Glasgow,  managed  to  deceive  the  Western  Bank 
of  Scotland,  and  to  keep  themselves  afloat  long  after  they  were  insol- 
vent. The  amount  involved  in  the  deception  Avas  enormous  (some  £408,- 
000),  and  wIrmi  the  bubble  burst,  as  it  could  not  fail  to  do,  it  had  much 
to  do  with  the  stoppage  and  ruin  of  the  bank  itself. 

It  may  be  said  without  a  carping  style  of  criticism  that  the  officers 


156  BANKING    AND    COMMERCE. 

of  the  bank  miglit  surely  have  diseovered  what  was  going  on  before  the 
situation  became  dangerous. 

Another  instance  of  the  same  kind  was  in  the  case  of  a  great  house 
in  the  Leather  trade,  who  with  headquarters  in  London,  had  established 
a  network  of  branches  and  correspondents  by  means  of  which  an 
enormous  amount  of  bills  was  kept  afloat  far  beyond  the  actual  business 
transacted.  When  the  firm  failed  it  was  found  that  no  less  than  twenty- 
nine  of  these  "drawing  posts"  had  been  made  use  of,  and  that  the 
fraudulent  bills  amounted  to  no  less  than  £620,000!  In  this  case  a  cer- 
tain amount  of  real  business  was  done  with  some  of  the  corresponding 
houses,  giving  color  to  the  bills  offered  for  discount.  It  is  evident,  how- 
ever, that  in  this  case,  a  vigilant  stj^le  of  doing  business  would  have  dis- 
covered the  fraudulent  character  of  the  operations  carried  on.  So  far, 
however,  was  this  from  being  the  case  that  the  London  bank  where  the 
account  was  kept  carried  on  the  discounting  operations  of  the  firm  in 
such  a  reckless  manner  as  to  raise  the  imputation  that  the  manager  was 
a  particeps  criminis  in  the  affair.  He  was  on  such  terms  of  intimacy 
with  the  partners  of  the  house  that  a  sort  of  slang-falk  was  current  be- 
tiveen  them,  according  to  which  a  small  batch  of  bills  was  called  a  tea- 
spoon, a  larger  batch  a  dessertspoon,  and  a  batch  of  considerable  amount 
a  tablespoon.  In  the  examination  before  the  bankruptcy  court,  it  was 
revealed  that  the  manager  of  the  bank  had  been  in  the  habit  of  send- 
ing over  to  the  firm,  asking  whether  they  had  any  bills  to  discount,  thus 
grossly  violating  all  natural  order,  and  letters  from  him  were  produced 
in  court  such  as  the  following: 

My  dear  M.: 
We  are  flush  this  morning.     Send  me  over  a  tablespoon. 

Yours,  .     _      ,, 

A.  B.,  Manager. 

If  ever  in  the  dealings  of  banker  and  customer  there  was  a  do^vnright 
incentive  to  extravagance  and  fraud  it  was  offered  in  this  instance. 

It  cannot  be  wondered  that  the  bank  itself  had  only  a  short  career. 
It  was  regularly  organized,  and  had  the  ambitious  title  of  The  Bank  of 
London.  But  it  ran  only  a  short  career  and  was  wound  up  in  disgrace, 
with  a  heavy  loss  to  the  stockholders. 


CHAPTER   XXI. 

FOREIGN  BILLS. 

Bills  With  Documents  —  Other  Classes  of  Bills  —  Drawing  of 
Fraudulent  Bills — Bills  Drawn  Against  Future  Shipments — 
Sterling  Bills  of  Banks  and  Finance  Houses — The  Baring 
Crisis  Recalled. 

THE  bills  drawn  upon  Great  Britain  or  other  countries  against  goods 
sliipped  there  are  in  a  different  class,  so  far  as  bookkeeping  is 
concerned,  from  the  foregoing,  being  drawn  payable  in  sterling  or 
other  foreign  currency,  and  necessitating  a  different  style  of  treatment 
in  a  banker's  books.  But  they  are  essentially  the  same  in  effect  as  bills 
drawn  upon  some  commercial  centre  in  the  country.  They  represent, 
cr  should  represent,  either  purchases  of  goods,  or  goods  sent  on  consign- 
ment. They  are  subject  to  the  same  risks  of  non-acceptance  or  non-pay- 
ment, saving  only  the  fact  that  there  are  attached  to  a  large  proportion 
of  commercial  bills  of  exchange  what  are  called  documents,  viz.,  bills  of 
lading  and  policies  of  insurance,  which  are  transferred  to  the  bank,  and 
ivhich  are  held  as  security  until  the  bill  is  paid. 

It  was  at  one  time  a  sort  of  superstition  amongst  bank  officials  that  a 
bill  drawn  in  sterling,  payable  in  pounds,  shillings,  and  pence,  was,  by 
that  fact  a  safer  document  than  a  bill  drawn  in  dollars  and  cents.  There 
was  some  ground  for  this  opinion  in  the  fact  that  it  was  not  so  easy  for 
accommodation  pajDcr  to  be  manufactured  i^ayable  in  sterling  money  as  it 
was  when  the  note  was  made  by  persons  in  the  same  town.  At  one  time, 
M'hen  the  Canadian  law  imposed  heavy  penalties  on  the  dishonor  and 
return  of  a  sterling  bill,  it  would  have  been  a  serious  business  for  any 
one  to  concoct  accommodation  paper  payable  in  London.  These  penalties 
have  been  largely  done  away  with.  Yet  it  is  still  much  more  difficult  to 
float  accommodation  foreign  bills  than  inland.  It  has,  however,  been 
done. 

There  are  several  distinct  classes  of  bills  drawn  payable  in  sterling 
cr  other  foreign  money,  viz.,  commercial  bills,  banker's  bills,  bills  drawn 
by  finance  houses  or  other  corporations  upon  their  agents,  and  bills  drawn 
by  governments.  It  is  of  the  first  of  these  that  the  present  chapter  will 
treat. 

Commercial  bills,  properly  so-called,  payable  in  sterling  or  other 
foreign  money,  arc  drawn  by  the  seller  or  consignor  of  exported  goods  on 
the  purchaser  or  consignee  on  the  other  side  of  the  Atlantic.  Of  these 
there  are  several  varieties,  and  the  risk  to  the  banker  dealing  with  them 
varies  greatly. 

157 


158  BANKING    AND    COMMERCE. 


Bills  with  Documents. 


It  has  become  customary  of  late  years  in  several  of  the  larger  branches 
of  the  export  trade  for  the  exporter  to  secure  himself  from  loss  by  attach- 
ing bills  of  lading  and  policies  of  insurance  to  his  bills.  These  documents 
are  so  drawn  that  the  goods  shipped  cannot  pass  into  the  possession  of 
the  purchaser  until  he  has  paid  the  bill  (if  he  has  accepted  it).  If  he 
fails  to  pay,  or  refuses  to  accept  it,  the  banker  who  has  bought  the  bill, 
in  addition  to  his  claim  against  the  drawer,  acquires  property  in  the 
goods,  and  can  sell  them  as  the  law  may  allow,  placing  the  proceeds  tO' 
account  of  the  bill.     The  drawer  is  then  liable  for  the  deficiency,  if  any. 

It  might  be  supposed  that  this  proceeding  would  make  a  banker  so- 
safe  that  the  purchasing  of  such  bills  w^ould  become  almost  a  mechanical 
operation,  requiring  neither  knowledge  nor  good  judgment.  But  experi- 
ence dissipates  this  delusion.  Every  banker  who  has  had  to  do  with  bills 
of  this  class  is  aware  that  the  same  considerations  arise  with  regard  to 
them  that  are  needful  with  inland  bills.  To  begin  with,  he  has  to  consider 
the  character  of  the  shipper,  both  as  to  honesty  and  capacity.  As  to 
honesty;  for  the  bills  of  lading  may  not  be  genuine.  Instances  have  been 
known  of  forged  bills  of  lading  being  attached  to  sterling  bills,  and  heavy 
losses  suffered  by  the  bank  purchasing  them. 

But  supposing  the  bills  of  lading  to  be  genuine,  they  may  be  very 
insufficient  securit}'^  for  the  bill  to  which  they  are  attached.  For  the 
shipper  may  have  only  an  imperfect  knowledge  of  the  merchandise  he  is- 
shipping,  and  sends  across  the  Atlantic  goods  which  no  prudent  merchant 
will  accept  against.  Or  the  shipper  maj^  be  of  that  sanguine  tempera- 
ment whicli  invariably  leads  him  to  think  his  goods  worth  more  than  they 
are,  in  which  case  his  bill  is  drawn  for  too  large  an  amount.  In  both 
these  cases  the  bill  is  liable  to  be  refused  acceptance,  and  the  banker 
may  find  himself  with  the  goods  upon  his  hands  which  the  English  mer- 
chant, on  the  spot,  considers  not  worth  as  much  as  the  bill.  Then  ensues 
one  of  the  most  unpleasant  of  all  a  Canadian  or  American  banker's  ex- 
periences, viz.,  the  bringing  to  sale,  in  a  distant  market,  of  goods  which 
are  stamped  as  undesirable  by  the  very  fact  of  their  being  in  the  hands, 
not  of  a  merchant,  but  of  a  bank.  The  goods  must  be  warelioused  and 
insured.  Charges  begin  to  accimiulate,  A  broker  must  be  employed. 
The  goods  are  offered  for  sale,  but  naturally  purchasers  are  shy.  Offers 
are  made  which  are,  perhaps,  forty  per  cent,  less  than  the  amount  of  the 
bill.  If  the  offers  are  accepted,  a  loss  more  or  less  is  certain.  If  they 
are  not,  the  banker  takes  the  risk  of  the  market.  A  rise  will  bring  him 
out;  a  fall  will  increase  the  loss  unless  the  drawer  can  make  it  good. 
The  holding  of  goods  becomes  therefore  a  speculation;  meanwhile  one 
thing  is  certain — that  charges  are  increasing. 

But  the  banker  has  another  party  to  deal  with  in  these  cases,  viz., 
the  shipper  of  the  goods,  who  is  his  own  customer. 


FOREIGN    BILLS.  159 

It  is  not  an  unknown  experience  tliat  he  intervenes  respecting  the  sale, 
refusing  to  consent  to  the  goods  being  disposed  of  at  a  lower  price  than 
will  meet  the  bill.  Always  sanguine  that  the  market  will  turn  in  his  favor, 
he  constantly  objects  to  sale  at  such  a  figure.  If  this  does  not  turn  out 
to  be  the  case,  and  the  banker  exercises  his  legal  power  and  sells  the 
goods  at  a  sacrifice,  the  drawer  will  be  apt  to  contend  that  his  goods 
have  been  slaughtered,  and  resist  a  claim  for  the  deficiency.  Thus,  even 
with  documentary  bills,  as  they  are  called,  a  banker  may  have,  and  many 
a  banker  has  had,  not  only  much  harassing  anxiety  and  labor,  but  much 
ultimate  loss.  For,  in  some  cases,  the  overdrawing  arises  from  impending 
embarrassment;  and  then  non-acceptance  of  the  bills  is  a  prelude  to 
failure. 

From  all  this  it  follows  that  the  character  and  standing  of  the  drawers 
of  documentary  bills  should  be  as  carefully  considered  as  if  no  docu- 
ments were  attached. 

This  is  particularly  the  case  when,  as  sometimes  happens,  the  drawer 
desires  the  documents  to  be  given  up  on  acceptance.  If  this  be  consented 
to  (and  both  the  shipper  of  the  goods  and  the  banker  must  consent), 
the  bill  will  rest  entirely  on  the  credit  of  the  parties  to  it.  There  is, 
however,  this  difference  between  such  a  bill  and  one  which  never  had 
documents  attached  to  it  at  all,  viz.,  that  whereas  the  latter  may  have 
been  merely  affirmed  by  the  drawer  to  represent  a  shipment,  the  docu- 
ments attached  to  the  former,  if  genuine,  afford  absolute  proof  of  it. 

The  bills  to  which  documents  are  attached  are  chiefly  those  in  the 
grain  trade,  the  cotton  trade,  and  the  trade  in  dairy  and  other  food  prod- 
ucts. 

Bills  without  documents  offered  by  persons  in  these  branches  of  busi- 
ness should  be  drawn  against  balances  that  have  accrued,  and  the  banker 
should  be  satisfied  of  this  before  buying  them. 

Other  Classes  of  Bills. 

But  large  numbers  of  commercial  bills  are  drawn  by  firms  in  other 
branches  of  business,  which  being,  as  a  rule,  unaccompanied  by  docu- 
ments, must  be  cashed  on  the  credit  of  the  drawer  alone.  At  the  time 
such  a  bill  is  cashed  it  is  a  bill  with  only  one  name,  and  the  banker  has 
to  take  the  risk  of  its  being  accepted. 

Bills  in  the  timber  trade,  the  leather  trade,  and  bills  drawn  against 
manufactured  goods  are  usually  of  this  class. 

The  name  of  the  firm  on  whom  such  a  bill  is  drawn  matters  not  in  the 
least  at  the  outset;  for  any  man  can,  if  he  pleases,  draw  a  sterling  bill 
on  any  other  man  for  any  amount.  John  Smith,  let  us  say,  is  carrying  on 
a  small  business  in  a  lumber  centre  in  Canada.  He  can,  if  he  chooses  to 
commit  a  fraud,  and  to  expose  himself  to  the  consequences,  draw  a  bill 
for  ten  thousand  pounds  upon  the  wealthiest  timber  merchant  in  England. 
And  he  can  offer  it  to  a  bank  manager,  telling  him  that  it  is  drawn  in 


160  BANKING    AND    COMMERCE. 

course  of  business,  and  will  be  accepted  on  presentation.  The  banker 
knows  that  the  liouse  on  whom  the  bill  is  drawn  is  abundantly  good  for 
ten  thousand  pounds,  or  ten  times  as  much,  and  can  scarcely  help  being 
influenced  by  the  sight  of  such  a  powerful  name,  though  it  may  be  that 
the  drawer  has  no  more  right  to  use  it  than  he  would  have  to  draw  on  the 
Bank  of  England  for  a  million. 

The  banker  has  therefore  to  consider,  when  a  sterling  bill  is  offered, 
unaccompanied  by  documents,  whether  his  customer  is  likely  to  have 
dealings  for  such  an  amount  with  the  English  house;  whether  he  has 
ever  known  of  transactions  between  them,  whether  the  course  of  his  busi- 
ness lies  that  way;  and,  in  fact,  whether  he  ever  had  the  right  to  draw 
a  sterling  bill  upon  anybody.  By  such  reflection  and  queries  he  will  easily 
be  able  to  satisfy  himself  whether  the  transaction  is  genuine  and  the  bill 
likely  to  be  accepted.  But  such  things  have  been  known  as  for  a  banker, 
possibly  a  young  beginner  in  the  responsibilities  of  management,  being 
persuaded  to  give  cash  for  a  fraudulent  foreign  bill,  in  which  case  he 
will  have  a  rude  shock  of  awakening  on  learning  that  the  bill  has  not 
been  accepted,  and  never  will  be.*'' 

The  example  in  the  accompanying  note  is  adduced  to  show  the  neces- 
sity of  only  buying  "free"  bills  when  written  authority  to  draw  is  shown, 
or  in  the  case  of  commercial  bills  from  houses  whose  relations  with  the 
drawee  are  .such  that  no  bill  is  likely  to  be  refused  acceptance.  And 
such  houses  there  are,  firms  that  have  drawn  millions  of  pounds  sterling 
of  bills  in  the  course  of  their  business  of  which  not  one  has  ever  failed 
of  being  honored. 

The  Drawing  of  Fraudulent  Bills. 

Yet  the  history  of  Canadian  banking  has  furnished  singular  instances 
of  fraudulent  bills  being  negotiated  by  houses  of  apparently  good 
standing. 

Some  years  ago  a  house  in  the  timber  trade  in  a  certain  part  of 
Canada,  which  had  conducted  its  business  soundly  for  a  long  course  of 
years  and  had  established  itself  in  good  credit,  became  embarrassed,  and 
to  keep  itself  afloat  set  on  foot  a  system  of  drawing  free  bills  from 
\arious   centres   where   it   professed   to   do   business.      The  house  opened 


49  A  case  is  known  to  the  writer  wlieio  a  ncw-comor  to  Canada,  moving  In 
the  Ijest  circles,  who  had  made  arrangements  to  enter  into  partnership  with  a 
manufacturing  house,  Induced  a  banlter  to  cash  a  sterling  bill  for  about  four 
thousand  pounds,  alleging  that  this  amount  was  coming  to  him  from  his  father's 
estate,  and  that  the  legal  firm  on  whom  he  drew  had  authorized  the  bill.  But 
they  refused  to  accept  it,  alleging  that  the  estate  was  in  no  position  at  the  time 
to  meet  such  a  demand  upon  it.  The  banker  indignantly  demanded  payment 
from  the  party  who  had  sold  it,  but  he  was  entirely  unable  to  refund.  The 
proceeds   had   gone   into   the   business,    and   he   could   not   get   them  out. 

This  was  not  a  case  of  obtaining  money  under  false  pretences,  for  he  hon- 
estly believed  he  had  the  right  to  draw.  But  more  than  two  years  elapsed  be- 
fore the  estate  was  able  to  pay  the  money,  and  during  the  whole  of  this  time 
the   banker    had    to    return    this   protested    hill   in    his   statements   to   hp;\d    office. 


FOREIGN    BILLS.  l6l 

offices  at  several  additional  points  in  Canada,  Montreal  being  one;  also 
in  Boston  and  New  York.  These  were  all  in  correspondence  with  an 
agency  or  branch  house  in  Great  Britain.  Different  names  were  adopted 
for  these  firms  in  order  to  carry  on  the  deception,  but  the  original  names, 
both  in  Canada  and  England,  were  of  firms  of  weight  and  standing,  and 
a  considerable  amount  of  actual  business  was  done. 

The  machinery  once  started,  and  credit  established,  the  leading  spirit 
of  the  concern,  a  man  of  experience  and  great  plausibility,  found  no 
difficulty  in  obtaining  cash  for  the  bills  he  drew.  Some  of  these  were 
bona  fide,  and  were  paid  in  the  ordinary  course  out  of  sales  of  timber — 
a  circumstance  which  added  to  the  danger.  Thus,  credit  was  kept  up. 
But  the  actual  trade  of  the  concern  resulted  in  continuous  loss.  The 
losses,  however,  were  easily  met  by  the  proceeds  of  new  bills,  some  of 
them  negotiated  in  Montreal,  some  in  Boston,  some  in  New  York;  such 
proceeds  being  cabled  over  to  London  and  api)licd  in  payment  of  matur- 
ing bills  or  deficiencies  in  sales. 

Upon  a  small  foundation  of  actual  business  was  raised  a  huge  super- 
structure of  fictitious  drawings,  which  were  so  cleverly  managed  that 
various  bankers  and  finance  houses  both  in  Canada  and  the  States  were 
deceived.  This  clever  operator  would  sell  a  genuine  bill  at  one  time  and 
a  fictitious  bill  at  another;  a  fictitious  bill  to  one  bank  and  a  genuine  bill 
to  another,  transferring  the  proceeds  of  a  bill  sold  in  Montreal  to  Boston 
and  buying  a  cable  transfer  therewith,  reversing  the  process  the  following 
week,  or  changing  Boston  for  New  York. 

These  were  all  free  bills,  drawn  under  different  names,  and  on 
apparently  different  houses  in  London.  Yet  the  whole  circle  was  in 
reality  but  one  concern,  the  afl'air  being  wholly  in  the  hands  of  one  man. 
Many  subordinates  co-operated  with  him,  both  on  this  side  of  the  Atlantic 
and  on  the  other,  most  of  whom  were  entirely  ignorant  of  the  real  char- 
acter of  the  operations  they  were  helping  to  carry  out. 

The  bubble,  of  course,  burst  in  time.  The  leading  schemer  took  care 
to  be  out  of  the  way  when  the  bills  came  back,  but  sundry  banks  and 
bankers  shortly  found  themselves  possessed  of  large  claims  on  a  bankrupt 
estate  of  which  the  assets  were  undiscoverable. 

One  device  of  those  who  aim  to  get  sufficient  credit  to  enable  them  to 
sell  free  bills  is  to  commence  a  bona  fide  business  under  some  high  sound- 
ing name,  such  as  Cameron,  Boi^anquet,  McGregor  &  Co.,  the  very  name 
suggesting  wealth  and  capital.  After  a  few  months  of  genuine  business, 
during  which  drawings  are  promptly  paid,  their  bills  become  sufficiently 
known  on  the  market  to  enable  them  to  offer  them  in  various  banks. 

Probabh',  as  thej^  proceed,  they  may  adopt  a  cunning  method  of  sup- 
porting their  credit,  by  refusing  to  take  any  but  the  highest  price  for 
their  bills,  and  withdrawing  them  from  the  offer,  thus  creating  the 
impression  that  they  have  abundant  means  at  command.  Thus  the  bills 
11 


162  BANKING    AND    COMMERCE. 

acquire  a  character  and  are  readily  purchased,  the  regular  operation  of 
the  house  lending  color  to  their  genuineness. 

The  time  comes  at  length  for  a  great  coup.  Simultaneously  a  number 
of  bills  are  drawn,  offered  to  all  the  banks  who  will  take  them,  and  sold. 
Then,  on  some  morning  later  on,  the  community  is  startled  to  find  the 
office  closed  and  the  partners  fled  the  country.  Some  banks  shortly  after 
have  numerous  batches  of  worthless  protested  bills  in  their  possession. 

This,  or  something  like  it,  has  actually  occurred  in  Canada,  and  it 
is  always  liable  to  occur  when  the  free  bills  of  a  commercial  house  can  be 
easily  negotiated  with  banks  who  are  ready  to  buy  them  in  entire  ignor- 
ance of  the  total  amount  afloat.  It  is  a  good  rule,  in  such  cases,  for  a 
bank  to  determine  that  it  will  take  all  or  none;  and,  if  all,  then  for  un- 
doubted reasons;  the  only  exception  being  when  the  drawers  are  of 
known  wealth  and  whose  business  is  of  such  a  magnitude  as  to  justify 
the  domiciling  of  their  free  bills  with  various  banks. 

Releasixg  Documents  ox  Acceptance. 

When  the  question  of  giving  up  documents  on  acceptance  is  raised,  a 
banker  will  be  careful  to  have  the  permission  of  his  own  customer  on  this 
side  before  consenting  to  it.  And  this  permission  must  be  a  written  one, 
for  nothing  would  be  more  likely  to  create  difficulty  in  case  a  bill  was 
dishonored  than  a   failure  to  establish   consent. 

To  give  up  documents  without  consent  would,  of  course,  release  the 
drawer  from  liability. 

In  some  cases  a  drawee  will  request  documents  to  be  given  up  in 
exchange  for  a  banker's  or  broker's  guarantee.  The  guarantee  of  a  bank, 
as  banks  are  now  in  Great  Britain,  is  about  as  good  security  as  can  be 
conceived. 

But  of  brokers  there  are  numerous  varieties,  from  wealthy  firms  of 
unlimited  credit,  to  the  smaller  class  who  are  hardly  good  for  a  thousand 
pounds.  In  the  case  of  these,  a  banker  on  this  side,  and  his  customer 
with  him,  are  generally  guided  by  the  judgment  of  their  banking  cor- 
respondents on  the  other.  And  it  is  to  be  said  that  they  exercise  the 
discretion  committed  to  them  with  remarkable  prudence.  Cases  have 
not  been  infrequent  where  a  bank  in  one  or  other  of  the  great  ports  of 
Great  Britain  has  exercised  this  discretion  in  multitudes  of  cases  during 
manv  successive  years,  and  to  the  amount  of  many  millions  sterling, 
without  once  making  a  mistake. 

Bills  Drawn  Against  Future  Shipments. 

There  is  another  class  of  bills  which,  though  not  drawn  against 
shipments  actually  made,  are  sometimes  classed  as  "commercial,"  inas- 
much as  they  are  drawn  against  goods  that  are  to  be  shipped.  In  the 
complicated  arrangements  between  merchants  of  different  countries,  it 
is  sometimes  the  case  that  a  house  in  London  or  Liverpool  will  agree  to 


FOREIGN    BILLS.  l63 

accept  bills  for  a  drawer  in  consideration  of  goods  to  be  shipped  here- 
after. 

Such  arrangements,  of  course,  argue  a  very  high  degree  of  con- 
fidence, which  confidence  may  be  well  placed  or  misplaced.  This,  how- 
ever, is  not  altogether  the  concern  of  the  banker  on  this  side,  whose 
business  is  simply  to  be  satisfied  that  such  an  arrangement  exists,  so 
that  he  may  be  sure  that  the  bills  he  buys  will  be  accepted.  Sometimes 
this  is  secured  by  an  engagement  in  writing,  either  special  or  general, 
that  is,  either  to  accept  all  bills  that  may  be  drawn,  or  to  accept  bills 
for  a  certain  amount  and  during  a  certain  time. 

It  is,  however,  not  uncommon  for  an  exporting  merchant  on  this  side 
to  be  so  well  established  as  to  capital  and  reputation  that  his  bills  can 
be  negotiated  without  any  engagement  to  accept  being  required.  In  that 
case,  however,  a  banker  on  this  side  requires  to  keep  himself  particularly 
well  informed  as  to  the  condition  of  both  houses  concerned.  For  changes 
in  these  times  are  rapid.  Partners  die,  and  capital  is  drawn  out.  New 
partners  are  introduced  who  change  the  whole  style  of  the  business;  it 
may  be  for  the  better;  but  possibly  for  the  worse.  And  a  strong  house, 
in  these  times  of  huge  operations  and  speculation,  may  lose  their  whole 
capital  in  a  year.  It  is  thus  incumbent  on  a  banker  who  buys  such  bills  to 
be  satisfied  in  the  first  place  that  the  former  relations  between  the  parties 
still  exist,  and  then  that  the  house  on  the  other  side  is  as  good  as  ever. 

The  only  other  class  of  commercial  bill  to  be  noticed  is  that  where  a 
commercial  house  has  offices  on  both  sides  of  the  Atlantic.  A  manufac- 
turing firm  in  Canada  may  have  an  agency  in  England,  and  a  resident 
partner  in  some  large  centre.  The  name  of  the  firm  will  probably  be 
changed  in  that  case;  the  Brown,  Jones  and  Robinson,  of  New  York, 
becoming  the  Jones,  Brown  &  Co.,  of  Liverpool.  But  the  responsibility 
i^  the  same. 

The  banker  in  all  such  cases  has  constantly  to  bear  in  mind  that  his 
bill  is  a  one-name  bill  and  nothing  more.  In  fact,  such  bills  have  a  strong 
tendency  to  degenerate  into  accommodation  bills  based  on  nothing. 

Sterling  Bills  of  Banks  and  Finance  Houses. 

This  is  a  class  of  bills  well  known  in  all  exporting  centres,  and  it 
forms  the  great  medium  of  remittance  by  importers  on  this  side  the 
Atlantic. 

It  is  one  of  the  most  noticeable  developments  of  the  financial  opera- 
tions of  modern  times,  that  foreign  bills  of  exchange  are  dealt  in  exactly 
as  a  merchant  deals  in  goods.  And  just  as  the  merchant  is  a  necessary 
factor  between  the  buyer  and  seller  of  goods,  so  is  the  bank  or  finance 
house  between  those  who  draw  bills  against  commodities  exported  and 
those  who  desire  to  pay  for  commodities  imported. 

When  a  merchant  ships  a  quantity  of  grain,  cotton  or  any  other 
staple  across  the  ocean,  he  has  the   power  to  draw  a  bill  of  exchange 


1(51  BANKING    AND    COMMERCE. 

against  it.  In  a  primitive  condition  of  tilings  and  if  the  comnuinity  in 
which  he  lives  is  a  small  one,  his  neighbor  who  has  bought  goods  abroad 
and  desires  to  pay  for  them,  might  approach  him  and  say,  "If  you  will 
draw  a  bill  for  a  thousand  pounds  against  that  cotton  you  shipped,  I 
will  give  you  the  cash  for  it.  For  I  want  to  send  that  amount  to  Eng- 
land." Thus,  by  direct  dealings  between  the  exporter  and  importer  the 
wants  of  each  might  be  satisfied.  But  this  mode  of  operation  would  not 
differ  much  from  dealings  by  barter,  in  the  case  of  merchandise.  For 
the  exporter  would  always  find  it  difficult  to  find  persons  who  wanted 
the  exact  amount  of  the  bills  he  had  to  draw  against  his  cotton,  v/hile  the 
importer  might  find  that  the  exporter  could  not  draw  for  as  much  money 
as  he  required  to  send;  or  at  the  time  he  wanted  to  remit,  for  anything 
at  all. 

There  thus  arose  the  necessity  for  an  intermediate,  a  person  with  com- 
mand of  money,  who  >vould  buy  the  exporter's  bills  at  any  time,  without 
reference  to  the  amount,  and  would  be  ready  to  sell  his  own  bill  to  the 
importer,  to  whatever  amount  would  satisfy  his  requirements. 

Before  this  could  be  done  the  intermediate  would  require  the  services 
of  a  corresponding  house  abroad ;  and  particularly  in  London.  This 
house  miglit  be  a  banking  house  of  the  old  school, — like  the  Glyns, — or 
a  financial  house  like  the  Barings  used  to  be;  and  the  arrangement  would 
be,  that  the  intermediate,  on  this  side,  would  remit  to  them  the  bills 
he  had  bought  from  the  exporter  and  draw  upon  them  the  bills  he  would 
sell  to  the  importer.  These  the  London  house,  or  bank,  would  agree  to 
accept,  on  terms  arranged.  This,  stated  in  its  simplest  form,  is  the 
foundation  of  the  great  masses  of  bills  that  are  constantly  being  drawn  by 
bankers  and  finance  houses  on  this  side,  on  bankers  and  finance  houses 
on  the  other. 

It  will  be  perceived  that  the  foundation  of  this  business  in  its  elemen- 
tal form  is  the  expout  of  goods,  in  which  term,  as  will  be  seen  later  on, 
more  than  merchandise  is  included,  the  bills  drawn  against  which  are 
sold  to  a  bank  on  this  side,  the  payment  of  which  bills  affords  the  means 
of  payment  of  the  bills  drawn  by  the  banker  against  it.  Thus,  all  these 
bankers'  or  financial  bills  rest,  if  legitimate,  upon  the  foundation  of 
salable  merchandise  or  securities,  exactly  as  all  legitimate  bankers'  loans 
and  trade  bills  do. 

The  export  of  articles,  therefore,  gives  rise  to  two  classes  of  bills: 
first,  the  bill  drawn  by  merchant  upon  merchant,  and  then  the  bills  drawn 
by  banker  upon  banker.  This  has  the  appearance,  at  first  sight,  of  that 
objectionable  operation,  the  drawing  of  sets  of  accommodation  bills; 
the  first  set  drawn  against  goods  and  having  a  mercantile  foundation,  the 
other  drawn  against  nothing.  The  sale  of  the  cotton  will  provide  the 
means  of  paying  the  first,  but  out  of  what  fund  is  the  second  to  be  paid  } 
How  can  the  sale  of  so  many  bales  of  cotton  of  a  certain  value  ))ay  more 
than  one  of  the  bills  drawn  against  it  for  that  amount.^ 


FOREIGN    BILLS.  l65 

A  consideration  of  tlic  facts  will^  liowcvcr,  show  tliat  lliis  supposition 
would  be  erroneous. 

Wliat  takes  place  is  really  this:  a  merchant  in  New  York  sends  over 
to  a  Liverpool  rfierchant  a  quantity  of  cotton,  worth,  let  us  say,  a  thousand 
pounds.  Against  this  cotton  he  draws  a  bill  for  a  thousand  pounds.  This 
bill  is  simply  an  order  to  the  Liverpool  merchant  to  pay  a  thousand 
pounds  lo  the  person  who  will  present  that  bill.  But  what  becomes  of 
the  bill.^  In  the  ordinary  course  of  business  a  banker  in  New  York  buys 
it,  pays  the  exporter  a  thousand  pounds  for  it  (less  exchange)  and  ob- 
tains the  right  to  collect  the  same  amount  in  Liverpool.  Having  that 
document,  giving  him  the  right  to  receive  a  thousand  pounds  in  Liverpool, 
he  sends  it  over  to  his  correspondent  in  London,  directing  him  to  collect 
the  money  and  place  it  to  his  credit.  When  the  Liverpool  merchant  pays 
the  bill  and  gets  it  from  the  London  banker,  that  banker  will  have  a 
thousand  pounds  of  the  New  York  banker's  money  in  his  possession. 
How  is  the  latter  to  get  it?  He  can,  if  he  pleases,  write  a  letter  order- 
ing it  to  be  sent  over  in  gold  packed  up  in  a  box;  w^hich  indeed  is  some- 
times done.  But  a  much  simpler  process  than  that  is  available,  and  a 
much  more  useful  one,  for  it  subserves  the  needs  of  the  other  side  of 
commercial  operations.  The  importer  has  his  wants  as  well  as  the  ex- 
porter; viz.,  to  send  money  over  to  Europe  to  pay  for  goods.  But  in 
modern  financial  arrangements  there  is  no  need  for  him  to  send  a  box  of 
gold.  He  can  go  to  the  banker  Avho  bought  the  exporter's  bill  and  get  an 
order  for  his  London  correspondent  (who  is  collecting  a  thousand  pounds 
for  him)  to  pay  that  sum  to  the  importer's  correspondent.  This  order  is 
that  second  bill  of  exchange  just  referred  to,  which  the  importer  remits 
and  with  which  he  satisfies  his  obligation.  (This  second  bill,  let  it  be 
noted,  is  drawn  not  against  the  cotton,  but  against  the  money  lodged  in 
tlie  London  bank.)  Thus,  the  whole  operation  is  complete,  and  all 
accounts  settled  without  the  transmission  of  gold  at  all.  The  New  York 
exporter  gets  the  money  for  his  cotton  from  the  New  York  banker.  That 
banker  is  recouped  by  selling  his  bill  to  the  importer.  The  London 
banker,  as  the  final  intermediary,  receives  the  money  from  the  Liverpool 
merchant  and  tlicnwitli  pays  the  bill,  which  his  New  York  correspondent 
has  drawn  u})on  him.  Thus,  although  two  bills  have  been  drawn,  they 
have  not  been  drawn  by  the  same  person  upon  the  same  drawee,  but  by 
different  parties  upon  a  different  correspondent  and  to  effect  a  different 
purpose. 

And  the  proof  that  the  second  bill  is  not  an  accommodation  one  is 
that  both  of  them  have  been  paid  without  the  borrowing  of  money  in 
London.  If  the  second  bill  had  been  drawn  against  nothing,  there  would 
have  been  notliing  wherewith  to  pay  it.  But,  as  we  have  seen,  the  London 
banker  had  the  money  in  hand.  At  the  close  of  these  transactions  none  of 
the  parties  owed  the  other  anything;  whereas,  if  the  London  banker  had 


166  BANKING    AND    COMMERCE. 

paid  an  accommodation  bill  for  a  thousand  pounds,  the  New  York  banker 
who  drew  it  would  have  owed  him  the  amount. 

It  is,  however,  to  be  borne  in  mind  that  merchandise  is  not  the  only 
exportable  article  that  can  be  sent  for  sale  to  a  financial  centre  and  drawn 
against.  In  these  days  of  highly  developed  financial  business,  when  gov- 
ernment and  other  loans  are  negotiated  through  financial  houses  in 
London  or  Paris,  the  debentures  representing  them  are  sent  forward,  and 
drawn  against  exactly  as  if  they  were  so  many  bales  of  cotton  or  barrels 
or  flour.  The  bills  are  sold  by  the  borrowing  government  to  bankers  or 
capitalists  in  a  financial  centre,  who  forward  them,  along  with  the  bonds, 
to  their  London  correspondents.  These  bills  are  accepted  by  a  London 
financial  house,  who  pay  them  out  of  the  sale  of  the  bonds.  In  this 
manner,  loans  to  the  extent  of  hundreds  of  millions  are  carried  out, 
without  any  movement  of  gold,  exactly  as  is  the  case  with  mercantile 
transactions. 

In  like  manner,  when  a  great  railway  corporation  has  need  to  borrow 
money  in  Europe  on  its  bonds,  they  are  sent  across  and  drawn  against 
as  if  they  were  merchandise.  The  acceptors  of  the  bills  in  London 
or  Paris  take  the  risk  of  floating  the  bonds  and  accepting  against  them. 

The  Baring  Crisis  Recalled. 

But  as  these  bonds  have  been  treated  exactly  as  if  they  were  merchan- 
dise, it  has  happened  that  embarrassments  have  arisen  in  connection  with 
them,  just  as  embarrassments  arise  in  consignments  of  staple  goods,  A 
catastrophe  on  an  immense  scale,  in  connection  with  acceptance  against 
bonds  was  only  averted  some  years  ago  by  the  courageous  and  far-sight- 
ed action  of  the  Governor  of  the  Bank  of  England.  The  case  was  that  of 
the  great  house  of  Barings;  it  occurred  in  the  last  decade  of  the  nine- 
teenth century,  and  created  a  sensation  all  over  the  financial  world.  It  was 
indeed  so  extraordinary  as  to  be  deserving  of  permanent  record.  The 
house  of  Baring  Brothers  had  been  known  for  a  century  as  negotiators 
of  government  loans  for  states  and  countries  in  every  continent  on  the 
globe.  Their  character  for  prudence  and  judgment  was  so  high  that  for 
generation  after  generation  any  bond  on  which  they  placed  their  im- 
primatur was  accepted  by  investors  and  found  ready  sale.  Time,  how- 
ever, passed  on.  Old  partners  passed  away;  new  men  and  new  methods 
were  introduced,  corresponding  to  new  developments  in  modern  times. 
The  name  of  the  great  house  was  of  course  retained,  for  it  was  a 
synonym  of  wealth,  almost  equal  to  the  name  of  Rothschild.  Yet,  not- 
withstanding all  the  changes  in  the  personnel  of  the  firm,  the  commercial 
world  in  general  considered  the  House  of  Baring  to  be  as  good  as  ever, 
and  bought  its  bills  as  readily  as  they  would  those  of  the  Bank  of  Eng- 
land. 

But  about  the  time  spoken  of  it  became  known  in  the  inner  financial 
circles  of  London  that  the  Barings  had  negotiated  loans  to  an  enormous 


FOREIGN    BILLS.  l67 

amount  which  they  found  difficulty  in  placing.  This  was  especially  the 
case  with  loans  lo  the  Argentine  Government.  The  debenture  market  in 
fact  had  become  overstocked  with  them;  yet  the  Barings  had  accepted 
against  the  whole,  and  the  bills  were  constantly  falling  due.  These 
acceptances  were  met  for  some  time  out  of  other  resources  of  the  firm. 
They  were  able  also  to  borrow  large  sums  of  money  on  the  bonds.  All 
this  was  whispered  about  among  the  higher  magnates  of  Lombard  Street, 
and  the  whispering  gradually  spread  even  to  circles  on  this  .side  the 
Atlantic.  Such  a  thing  as  hesitating  to  buy  the  bills  of  Baring  had  never 
been  heard  of  in  New  York,  but  such  a  hesitancy  did  undoubtedly  prevail 
for  some  time. 

At  length  a  very  extraordinary  event  happened,  the  like  of  which 
had  never  been  known  in  the  financial  world.  A  few  of  the  heads  of 
the  leading  banks  of  London  were  invited  one  day  to  meet  the  Governor 
of  the  Bank  of  England,  and  confer  with  him  on  a  matter  of  importance. 
What  this  matter  was  they  could  not  divine;  but  on  entering  the  bank 
parlor,  they  were  informed  of  this  very  extraordinary  state  of  facts, 
namely,  that  the  Barings  were  under  acceptance  of  bills,  mostly  drawn 
against  Argentine  bonds,  to  the  amount  of  sixteen  million  'pounds;  that  the 
bills  were  coming  due  at  the  rate  of  about  a  million  pounds  a  week;  that 
the  Bank  of  England  had  already  made  large  advances  on  the  bonds; 
that  it  was  quite  impossible  for  the  Bank  to  carry  the  whole  burden; 
that  if  assistance  were  not  rendered,  the  Barings  would  have  to  suspend 
and  millions  of  pounds  of  bills  go  to  protest!  A  tremendous  piece  of 
intelligence  this ;  for  these  bankers  knew  that  if  such  an  event  did  happen 
there  would  be  one  of  the  severest  panics  ever  known  in  the  financial 
world,  and  that  not  in  England  only,  but  in  the  United  States  and  every 
great  monetary  centre  of  Europe. 

On  the  bankers  enquiring  what  the  Bank  of  England  had  to  propose, 
they  received  this  answer:  the  Governor  informed  them  that,  after  con- 
sultation with  his  colleagues,  they  had  concluded  that  other  banks  might 
fairly  be  asked  to  share  in  the  burden  of  meeting  the  acceptances,  inas- 
much as  they  were  all  interested  in  preventing  a  panic,  and  many  of  them 
were  themselves  holders  of  the   Baring  bills. 

After  much  consideration,  and  consultation  with  others,  it  was  finally 
concluded  by  London  bankers,  including  the  representatives  of  the  Scotch 
banks,  to  acquiesce  in  the  division  of  the  burden.  It  was  also  suggested, 
that  some  of  the  leading  banks  of  the  interior,  such  as  those  of  Liverpool, 
Manchester,  and  other  cities,  might  fairly  be  asked  to  join  in  the  move- 
ment. This  idea  was  acquiesced  in,  and  correspondence  opened  with  the 
leading  provincial  banks.  These  also  agreed  to  the  principle.  The  only 
thing  now  remaining  was  to  arrange  the  amount  of  the  advance  which 
each  bank  was  to  make  upon  the  bonds,  and  to  such  an  extent  did  a 
spirit  of  mutual  respect  and  confidence  prevail  amongst  these  magnates  of 
haul  finance,  that  a  distribution  was  made  without  difficulty. 


168  BANKING    AND    COMMERCE. 

The  Bank  of  England  undertook  by  far  the  largest  share  of  the 
burden.  Then  the  London  banks,  including  the  agencies  of  Scotch  and 
Irish  banks,  followed  with  their  respective  shares,  and  finally  the  great 
banks  of  ^Manchester,  Liverpool,  and  other  prominent  centres.  The  Bank 
of  England  undertook  to  see  after  the  retirement  of  the  whole  of  the 
acceptances,  and  the  other  banks  paid  in  their  quota  to  the  Bank  of 
England  to  enable  the  Bank  to  do  it.  When  these  arrangements  had 
been  completed,  every  banker  in  the  United  Kingdom  breathed  a  sigh  of 
relief,  seeing  that  the  shadow  of  an  impending  panic  which  had  overhung 
the  financial  world  was  dispersed,  and  that  business  could  go  on  as  usual. 
And  not  only  they,  but  bankers  in  great  centres  of  North  and  South 
America,  India,  China,  and  Australia — not  to  speak  of  the  Continent  of 
Europe — also  felt  easier  when  the  dreaded  possibility  of  the  Baring  bills 
being  returned  upon  them,  protested,  for  tens  and  hundreds  of  thousands 
of  pounds,  had  passed  away. 

As  for  the  great  house  itself,  it  went  into  liquidation.  A  considerable 
surplus  of  assets  remained  to  the  partners,  after  the  liabilities  were  all 
discharged,  but  the  prestige  of  the  name  of  Baring  was  permanently 
impaired.  The  partnership  was  dissolved,  and  a  new  company  formed,  of 
large  capital,  which  is  doing  the  same  kind  of  business,  but  which,  we 
may  be  very  sure,  will  never  overload  itself  with  unmarketable  securities. 

It  has  been  stated  that  the  bills  drawn  by  banks  on  their  foreign 
correspondents  have  their  foundation  in  exports.  This  is  true,  in  a  large 
majority  of  cases.  It  is,  however,  not  uncommon  for  banks  and  capital- 
ists in  London  to  open  a  credit  for  banks  or  finance  houses  abroad,  which 
credit  is  availed  of  by  the  drawing  of  bills.  To  this  extent  the  foreign 
bills  sold  in  the  financial  centres  of  this  continent  are  not  founded  upon 
merchandise.  They  are,  however,  a  mere  fraction  of  the  whole.  And, 
it  may  be  added,  such  drawings  are  invariably  covered  afterwards  by 
mercantile  bills. 

Yet  another  class  of  bills  may  be  briefly  noticed,  viz.,  such  as  are 
drawn  by  banks  or  capitalists  upon  their  own  offices  in  London  or  Paris. 
These  bills  afford  a  mode  of  raising  capital  which  may  be  profitably  em- 
ployed on  this  side  of  the  Atlantic.  The  bills,  however,  are  of  the  one- 
name  class,  and  no  matter  how  high  the  credit  that  the  one  name  com- 
mands (and  it  runs  up  into  very  many  millions  in  some  cases"'")  the  money 
market  of  London  will  at  times  discriminate  between  such  bills  and  those 
drawn  upon  a  London  bank. 

There  is  another  description  of  foreign  business  which  has  attained 
a  large  development  in  these  times,  viz.,  the  issuing  of  Credits  by  banks 
on  this  side  of  the  Atlantic  to  importers  of  staple  goods.     The  working  of 


50  It  is,  however,  known  to  old  bankers  that  in  the  groat  revulsion  of  1S57 
one  of  the  greatest  of  the  capitalist  houiscs  was  obliged  to  apply  for  assistance 
to  the  Bank  of  England.  The  Bank  loaned  the  firm  a  million  sterling,  and  en- 
trusted the  selection  of  the  securities  to  a  well-known  officer  of  the  Bank  of 
Montreal   in   New   York. 


FOREIGN    BILLS.  169 

this  system  illustrates  in  a  striking  degree  the  co-operation  of  banking 
and  commerce.  Let  us  put  the  matter  in  a  concrete  form,  that  it  may  be 
better  understood.  A  woolen  manufacturer  in  the  United  States  or 
Canada  requires  certain  wools  which  can  be  had  most  conveniently  in 
Australia.  How  is  he  to  get  them.''  It  would  not  be  reasonable  for  a  wool 
exporter  in  Australia  to  send  his  goods  to  Boston  or  Montreal  on  credit, 
or  for  an  importer  to  disburse  cash  to  bu}'  a  bill  to  send  to  Australia, 
which  bill  might  be  for  an  amount  much  less  or  much  more  than  the  value 
of  the  wool  his  correspondent  would  buy.  What  he  does  is  this:  A 
banker  in  Boston  or  Montreal  will  give  him  a  letter,  on  an  engraved 
form,  authorizing  any  correspondent  of  his  in  Australia  to  draw  on  a 
bank  in  London  or  Paris  for  any  amount  he  needs  up  to  a  certain  sum, 
the  bill  to  have  attached  to  it  an  invoice  for  wool,  a  bill  of  lading  for  the 
same,  and  a  policy  of  insurance.  With  this  document  in  hand,  the 
Australian  wool  exporter  can  ship  wool  to  America  and  obtain  cash  for 
it  at  once  from  a  bank  in  Melbourne  or  Sydney  by  drawing  in  conformity 
with  the  credit.  The  bill  with  its  documents  is  presented  and  accepted 
in  London,  the  bill  of  lading,  invoice  and  insurance  being  passed  on  to 
Boston  or  Montreal,  with  advice  of  the  amount  drawn  against  them. 
The  banker  on  this  side  of  the  Atlantic  then  advises  his  customer  that  he 
holds  the  documents  for  the  wool,  that  so  many  pounds  sterling  have  been 
drawn  against  it,  which  amount  is  at  his  debit,  for  which  he  is  called  on 
to  settle  by  furnishing,  on  the  terms  of  the  credit,  a  banker's  bill  on 
London.  Thus,  the  first  disbursement  of  the  wool  merchant  in  New  Eng- 
land or  Canada  is  coincident  with  the  arrival  of  the  goods  or  the  document 
representing  them.  And  a  clean  settlement  of  the  whole  transaction  has 
been  made.  For  the  credit  has  been  used  to  the  exact  amount  needed, 
and  the  balance  is  cancelled. "^^ 

Letters  of  credit  for  the  use  of  travelers  are  on  a  different  footing 
altogether.  There  is  no  merchandise  in  the  case,  and  the  use  of  the  credit 
is  simply  to  transmit  money  by  bills  of  exchange  in  the  ordinary  way, 
without  risk. 

One  final  remark  with  regard  to  foreign  bills  needs  to  be  made. 

The  development  of  messages  across  the  ocean  by  cable  has  given  rise 
to  numbers  of  monetary  transactions  between  different  countries  in  which 
bills  are  dispensed  with  altogether.  A  New  York  banker  can  order  his 
London  correspondent  to  pay  money  to  an  applicant  by  cable  message, 


51  It  is  a  point  of  very  important  consideration  with  a  banker  who  has  Issued 
a  commercial  credit  which  becomes  practically  an  advance  on  goods  In  transit 
secured  by  a  bill  of  lading,  whether,  and  on  what  terms,  he  should  give  up  the 
bill  of  lading  on  the  arrival  of  the  goods,  and  before  payment  by  the  customer. 
If  the  banker  does,  he  is  then  under  advance  without  security.  The  only  excep- 
tion to  this  is  when  the  customer  receives  a  bill  of  lading  for  the  purpose  of 
customs  entry  and  warehousing,  bringing  back  a  warehouse  receipt  within  a 
day  or  two.  In  this  case  the  banker  does  not  lose  his  hold  on  the  goods  unless 
there  Is  actual  fraud.  But  when  goods  are  allowed  to  be  placed  In  the  custom- 
er's warehouse   the   banker   will  generally  lose  his   security. 


170  BANKING    AND    COMMERCE. 

just  as  easily  as  he  could  by  drawing  a  bill.  The  importer  referred  to  in 
the  former  part  of  this  chapter  can  obtain  a  cable  transfer,  as  it  is 
called,  just  as  formerly  he  would  buy  a  bill  of  exchange.  By  means  of 
this  he  could  pay  a  London  merchant,  with  no  more  loss  of  time  than 
would  be  required  to  pay  a  bill  to  a  neighbor  across  the  street. 

These  transactions,  however,  require  different  arrangements  in  Lon- 
don. For  M'hen  a  bill  is  drawn  at  sixty  days  after  sight,  the  London 
banker  who  accepts  it  has  sixty  days  before  payment  in  money  is  required. 
But  a  cable  transfer  requires  payment  of  money  on  the  spot.  Now,  as 
no  London  banker  has  an  infinite  supply  of  money  at  command,  lie  has  to 
watch  the  daily  calls  upon  him  for  cash  with  as  much  care  as  a  banker 
does  on  this  side  the  Atlantic.  For  this  reason,  the  banker  on  this  side 
will  be  careful  when  selling  "cables"  to  keep  within  the  limits  prescribed 
for  his  drawing  on  London  for  cash. 


CHAPTER  XXII. 

OVERDRAFTS   IN   CANADA   AND   CASH   CREDITS   IN   SCOT- 
LAND. 

Dangehs  IX  OvERnRAFTs — Caxadi\n   Practice — Unsecured   Advances 
— Advantages  and  Disadvantages  of  the  Scotch  System. 

THERE  is  perhaps  no  more  important  matter  to  which  the  attention 
of  directors   and   general  managers   of  banks   should   be   directed 
than    overdrafts.      For    some    of   the   most    dangerous    departures 
from    sound    banking    principles    that   have    transpired    in    Canada    have 
occurred  in  connection  witli  thcni.     For  this  reason  it  has  been  dtsirable 
to  devote  a  chapter  to  a  careful  consideration  of  the  subject. 

The  question  of  overdrafts  is  entirely  a  different  one  in  England  and 
Scotland  from  what  it  is  in  Canada  and  the  United  States;  and  for 
this  reason:  In  Scotland,  advances  to  customers,  as  distinguished  from 
the  discounting  of  trade  bills,  are  made  by  allowing  the  current  account 
of  the  party  to  be  in  debt.  The  extent  to  which  this  shall  be  the  case 
is  fixed  by  the  board  of  directors;  and  for  this  amount,  security,  as  a 
rule,  is  held.  This  system  of  advancing  by  secured  debit  balances,  is 
the  well-known  cash  credit  system  of  Scotland,  the  same  system,  how- 
ever, being  common  all  over  the  north  of  England,  at  least.  This  system 
consists  simply  in  fixing  the  amount  to  which  the  debit  balance  of  a 
customer  shall  be  allowed  to  run.  And  in  Scotland,  and  in  many  parts 
of  England  too,  it  is  only  when  this  authorized  amount  is  exceeded  that 
the  account  is  said  to  be  overdrawn.  The  excess  only,  in  that  case,  is 
called  an  overdraft.  If  a  merchant  obtains  a  credit  of  a  thousand 
pounds,  from  a  Scotch  or  English  bank,  the  amount  is  notified  to  the 
manager,  whose  business  it  is  to  keep  the  current  account  debit  within 
that  sum.  Occasions,  however,  do  arise  when  the  merchant  may  draw 
a  check  which  oversteps  the  limit.  Sometimes  this  may  be  from  inad- 
vertence, sometimes  from  monetary  pressure.  If  the  manager  takes  the 
responsibilit}'  of  allowing  the  check  to  be  paid,  the  account  is  then 
overdrawn  by  so  much,  and  the  customer  will  be  requested  to  put  it  in 
order.  Or  a  customer  (and  this  is  the  proper  course)  may  interview  tht 
manager,  explain  that  some  expected  remittance  has  not  come  to  hand, 
and  ask  to  be  allowed  to  overdraw  his  account,  let  us  say,  for  a  week 
or  two,  to  the  extent  of  a  hundred  pounds.  The  manager  may,  or  may 
not  consent.  If  he  consents,  the  debit  balance  will  be  a  hundred  pounds 
more  than  it  ought  to  be.  Under  this  system  of  business  all  the  debit 
balances  of  current  accounts  are  constantly  under  the  view  of  the  man- 
ager of  a  branch;  and  if  a  prudent  man,  he  will  take  care  that  they  are 
all  in  order,  and  as  authorized.  For  he  is  held  responsible  for  any  over- 
drawing.     If  he   finds   that   a  teller  or  cashier  has  paid   the  checks   of 

171 


172  BANKING    AND    COMMERCE. 

a  customer  to  an  amount  beyond  the  sum  authorized,  he  will  call  him 
sharply  to  account,  and  insist  upon  his  getting  the  overdrawn  amount 
paid  in. 

Similarly,  the  debit  balances  of  customers  at  all  points  are  constantly 
under  review  at  headquarters;  and  for  this  good  reason,  that  the  loans 
or  advances  of  the  bank  are  all  to  be  found  there.  Overdrafts,  therefore, 
cannot  fail  to  be  noticed.  If  the  returns  from  a  certain  branch  show  that 
certain  accounts  are  overdrawn,  the  manager  will  be  called  to  account, 
asked  for  explanations,  possibly  sharply  reproved,  and  may  even  be 
suspended  from  his  functions,  unless  he  can  show  that  he  was  authorized 
to  allow  them  by  correspondence.  But  this  is  not  all.  It  is  perfectly 
easy  for  a  board  of  directors  to  examine  such  statements  of  debit  bal- 
ances, and  as  all  credits  in  this  shape  have  been  authorized  by  them,  it 
is  easy  for  them  to  see  whether  any  accounts  are  overdrawn.  If  any 
of  them  are,  they  will  no  doubt  ask  the  reason  why.  And  if  a  general 
manager  (or  officer  acting  as  such)  cannot  give  good  reasons,  he  is  liable 
to  displeasure  in  his  turn. 

Thus  the  whole  sj'stem  of  the  bank  works  harmoniously.  Everything^ 
is  clearly  apparent.  All  advances  are  regularly  reported,  considered, 
and  dealt  with  by  the  branch  manager,  and  the  general  manager,  up  to 
tjie  final  authority,  the  board  itself.^- 

OVERDRAFTS    IN    CaN.\DIAN    BaNKS. 

But  overdrafts  in  a  Canadian  bank  are  on  a  different  footing  from 
the  outset.  The  rule  is  that  current  accounts  are  all  expected  to  be 
in  credit.  A  general  manager,  therefore,  does  not  look  for  advances  in 
lists  of  deposit  balances.  Such  lists  are  generalh'  sent  at  much  longer 
intervals  than  the  statements  of  loans  and  discounts,  and  this  for  an 
obvious  reason.  Whilst  it  is  of  the  first  importance  for  a  manager  to 
keep  an  eye  on  the  total  amount  of  deposits,  so  as  to  keep  proper  re- 
serves, it  is  of  only  secondary  importance  whose  particular  money  it  is 
that  is  deposited  with  him.  Mr.  Thomas  Johnson,  let  us  say,  keeps  a 
current  account  with  one  of  the  branches  of  the  bank.  It  matters  little 
whether  the  balance  at  his  credit  is  $500  or  $5,000.  And  what  he  puts 
in  and  draws  out  week  by  week  is  not  a  matter  of  particular  interest 
to  the  management.^" 

But  if  Mr.  Johnson  owes  the  bank  money,  the  amount  he  owes  is  >\ 
matter  of  the  first  consequence.  If  he  owes  $5,000  he  may  be  abundantly 
good  for  it.  The  board  may  have  authorized  that  amount;  security  for 
that  sum  may  be  held.     But  let  us  suppose,  and  such  things  have  really 

52  This  is,  of  course,  the  system  in  theory.  Whether  it  is  properly  worked  out  in 
practice  will  depend  on  the  care  and  attention  the  directors  bestow  on  the  business 
of  the  bank.  The  best  system  may  be  badly  administered,  and  produce  poor  results. 
But  there  can  be  no  doubt  that  the  system  of  advances  prevailing:  in  Scotland  and 
the  north  of  England  is  a  much  safer  one  to  work,  and  that  under  it  the  direc- 
tors find  it  much  easier  to  keep  track  of  advances  made  at  various  points. 

5.3  If  Ml-.  Johnson  has  discounts  or  advances,  it  is,  of-courso,  dosiinblo  to  keep 
an  eye  upon  the  working  of  his  current  balances  as  bearing  on  the  profitableness 
of   his  account,    or   otherwise.      But   what   is  now    being    discussed    is    its    safety. 


OVERDRAFTS    IN    CANADA.  173 

happened,  that  whilst  $.>,000  is  the  sum  which  Mr.  Johnson  has  been 
iiuthorized  to  borrow,  a  weak  manager  has  been  prevailed  on  to  advance 
him  double  or  treble  that  amount.  This  is  a  state  of  things  to  create 
serious  concern.  For  the  general  management  may  be  well  aware  that 
the  latter  sums  were  not  only  entirely  unauthorized,  but  beyond  his 
ability  to  pay.  Underneath,  then,  what  may  be  a  single  line  of  a  state- 
ment, there  may  loom  up  the  horrid  figures  of  a  bad  debt.  It  is  apparent 
tlien  that  statefncnts  of  loans  and  advances  are  of  vastly  more  import- 
ance than  statements  of  credit  balances,  and  that  they  should  be  sent 
much  more  frequently,  and  in  such  a  form  that  they 'will  be  naturally 
looked  for,  readily  comprehended  by  directors,  and  attract  the  attention 
they  deserve. 

Yet  persons  on  this  side  the  Atlantic  may  draw  checks  which  turn  a 
current  account  to  a  debit;  and  here,  as  in  England,  a  manager  may 
think  the  amount  desired  to  be  perfectly  good,  and  take  the  responsi- 
bility of  allowing  it.  He  must  take  the  responsibility;  and,  at  times,  a 
very  serious  responsibility  it  is.  For  even  perfectly  good  customers  are 
not  all  considerate,  neither  are  they  all  attentive.  A  responsible  firm, 
considering  themselves  to  be  perfectly  good,  may  at  times  take  liberties 
with  their  account,  and  overdraw  to  a  considerable  amount.  The  mana- 
ger has  now  to  consider  whether  he  shall  refuse  the  check,  and  thereby 
offend  and  alienate  a  firm  whose  account  is  valuable,  or  whether  he  shall 
pay  the  check  and  so  make  an  unsecured  advance  without  authority,  to 
a  firm  whose  position  may  possibly  turn  out  not  to  be  so  good  as  he 
supposes. 

But  now,  supposing  the  check  has  been  paid  and  the  advance  made, 
is  a  manager  to  allow  it  to  appear  as  a  simple  item  in  a  list  of  deposit 
balances,  every  one  of  which  is  presumed  to  be  a  credit,  and  therefore 
returnable  only  at  considerable  intervals  to  head  office.''  Such  a  course 
is  obviously  dangerous;  all  which  leads  up  to  this  conclusion,  that  any 
overdrafts  in  the  deposit  ledger,  if  such  there  be,  should  be  reported 
in  the  same  statement  which  contains  the  loans  of  the  branch. 

It  should  be  the  business  of  a  general  manager  to  see  that  this  is 
done.  But  the  directors  may  very  properly  take  the  matter  up  also; 
first  seeing  to  it  that  statements  of  overdrafts  are  regularly  laid  before 
them,  and  then  taking  care  to  examine  them,  conferring  with  the  gen- 
eral manager,  and  giving  through  him  such  directions  as  may  be  needful. 
The  board  will  of  course  not  care  to  have  lists  of  trifling  sums  brought 
to  their  attention ;  they  would  do  well  therefore  to  fix  a  minimum  below 
which  no  report  need  to  be  made  to  them.  The  general  manager  will, 
however,  take  cognizance  of  them  all. 

Dangkrs   of   Making   Unsecured   Advances. 

The  making  of  advances  by  allowing  debit  balances  of  a  current 
account,  when  it  is  not  provided  for  as  part  of  an  established  system 
like  that  of  Scotland,  has  been  proved  to  be  dangerous.      The  advances 


174  BANKING    AND    COMMERCE. 

that  brought  ruin  to  tlic  Commercial  Bank  in  the  early  years  of  banking 
in  Canada  could  ne^er  have  assumed  the  disastrous  shape  they  did  if 
they  had  been  made  in  the  customary  manner,  viz.,  by  promissory  notes. 
For  it  was  not  simply  that  advances  were  allowed  to  grow  to  enormous 
dimensions,  but  the  fact  that  the  bank  was  unable  to  prove  that  the  debt 
was  contracted  by  the  corporation  that  was  supposed  to  owe  it.  There 
were  two  corporations  in  the  case,  very  intimately  connected,  but  legally 
distinct.  One  of  them  was  sound  and  solvent,  the  other  practically 
insolvent.  The  same  officers,  however,  governed  both.  The  loans  were 
negotiated  by  these  officers.  The  bank  supposed  they  were  advancing 
money  to  the  sound  and  solvent  company,  to  be  used  by  it  in  furthering 
the  business  of  the  weak  and  crippled  one  of  which  they  had  control. 
But  the  solvent  company,  when  called  upon  to  pay,  declared  that  they 
never  borrowed  the  money  at  all;  that  their  officers,  being  also  officers 
of  the  weaker  company,  borrowed  the  money  on  its  behalf.  Whai  issue 
was  joined  in  court,  the  bank  was  utterly  unable  to  prove  that  the  solvent 
company  was  its  debtor,  and  on  books  and  pass-books  being  produced  it 
was  found  that  both  in  the  ledger  and  in  the  pass-books,  the  headings 
had  repeatedly  been  in  the  name  of  the  weaker  company.  Thus  issues 
of  hundreds  of  thousands  of  dollars  hung  upon  the  entries  of  subordinate 
officers.  The  case  was  decided  against  the  bank,  which  decision  was  the 
beginning  of  its  downfall. 

Now,  had  the  advances  been  made  by  promissory  notes,  which  notes 
must  in  the  nature  of  things  have  been  drawn  in  a  clear  and  unmistaka- 
ble manner,  the  officers  must  have  signed  them,  either  in  the  name  of 
the  one  company  or  the  other.  The  liability,  in  that  case,  could  never 
have  been  disputed,  and  the  bank  would  have  been  saved  a  protracted 
and  costly  lawsuit,  with  an  enormous  loss  at  the  end  of  it,  which  loss 
proved  its  ruin. 

This  instance  may  be  said  to  prove  that  the  Canadian  system  is 
better  than  the  Scotch.  But  the  advances  of  the  Commercial  Bank  were 
not  made  on  the  Scotch  system  at  all.  They  were  made  on  a  deplorably 
bad  imitation  of  it,  in  which  its  most  essential  feature  was  lost  sight  of. 
Under  the  Scotch  system,  the  amount  of  the  credit  is  strictly  defined,  and 
a  bond  of  security  taken,  duly  signed,  sealed,  and  delivered,  for  the 
whole  amount.  If  these  advances  had  been  made  on  the  Scotch  system, 
the  solvent  company  would  have  been  required,  at  the  outset,  to  give  a 
bond  of  guarantee,  which  bond  would  have  been  drawn  by  the  legal 
advisers  of  the  bank,  making  the  solvent  company  liable  beyond  doubt. 
Then  further,  that  guarantee  would  have  fixed  the  amount  to  be  ad- 
vanced, an  invaluable  safeguard  against  advances  being  allowed  to  run 
on  indefinitely  as  they  did.  As  it  was,  the  advances  were  allowed  to  run 
to  nearly  ten  times  the  amount  verbally  agreed  upon  at  the  outset.  They 
were  made,  in  fact,  neither  on  the  Scotch  system  nor  tlie  Canadian.''* 

54  In  another  instance  known  to  the  writer,  one  of  the  heaviest  bad  debts  over 
made  by  a  Canadian  bank  arose  through  advances  to  a  certain  firm  being  allowed 
to  be   carried   on   In  the   shape   of  continual  overdrawlnga  of  a  very  active  current 

account. 


THE    SCOTCH    SYSTEM.  175 

It  is  at  this  time  of  day  vain  to  think  of  making  a  fundamental 
change  in  the  mode  of  making  bank  advances  in  Canada,  or  the  United 
States,  but  it  is  certainly  worth  while  to  consider  the  points  in  which 
the  Scotch  system  has  the  advantage.  In  speaking  of  Scotland,  let  it  be 
understood  that  a  considerable  part  of  England  is  included  too,  and 
specially  that  wherein  the  writer's  English  experience  was  gained. 

Advantages  and  Disadvantages   of  the   Scotch    System. 
The  advantages  of  the  Scotch  system  are  the  following: 

(1)  Advances  can  never  be  confounded  with  trade  bills.  Every 
banker  knows,  and  every  merchant  knows,  too,  that  there  are  funda- 
mental differences  between  these  two:  first,  in  the  risk;  next,  in  the 
availability;  and,  last  and  most  important  of  all,  in  the  amount  of  atten- 
tion they  require.  The  risk  of  trade  bills  (provided  only  they  are  bona 
fide  and  genuine)  is  immensely  less  than  the  risk  of  loans.  Their  avail- 
ability to  bring  in  money  when  due  is  immensely  greater.  And  as  to 
the  amount  of  attention  that  loans  require,  it  would  be  to  speak  within 
bounds  to  say,  that  they  require  as  a  rule  ten  times  as  much  as  trade 
bills.  To  this,  there  may,  of  course  be  exceptions.  In  all  bank  state- 
ments, therefore,  it  is  of  vital  importance  to  keep  advances  and  trade 
bills  separate.  This  is  most  effectually  done  under  the  Scotch  svstem, 
for  loans  are  entered  in  an  altogether  different  set  of  books  from  those 
which  contain  trade  bills,  and  they  are  reported  to  head  office  on  differ- 
ent statements.  But  in  Canadian  practice  they  are  apt  to  be  confounded, 
for  the  reason  that  both  are  made  by  promissory  notes  exactly  similar  in 
form,  both  are  entered,  commonly,  in  the  same  register  and  ledgers,  and 
both  are  included  in  statements  under  the  one  generic  term,  liabilities. 
They  are  apt,  in  fact,  to  get  so  inextricably  mixed  in  a  badly-managed 
office  that  it  has  taken  weeks  of  the  time  of  a  superior  officer  to  disen- 
tangle the  accounts  in  which  they  are  entered,  and  to  fix  the  primary  and 
secondary  liability  on   the  proper  parties. 

(2)  The  second  advantage  of  the  Scotch  system  is  that  all  advances 
are  initiated  in  the  first  place  and  authorized  by  the  board  of  directors. 
No  matter  in  what  branch  advances  are  made,  authorization  must  come 
from  headquarters.  This  has  so  long  been  the  established  custom  all 
over  Scotland  that  every  person  understands  it  and  conforms  to  it,  both 
branch  managers  and  customers  alike. 

It  is  quite  true  that  in  Canada  all  advances  on  credits  of  importance 
and  those  which  are  to  be  spread  over  a  whole  season,  are,  as  a  rule, 
applied  for  to  the  board,  and  not  entered  on  until  sanctioned  by  them. 
But  it  is  also  a  part  of  the  Canadian  system  that  discounts  of  promissory 
notes,  known  to  be  loans,  are  constantly  made  in  a  majority  of  offices, 
that  have  never  been  submitted  to  the  board  at  all.  The  first  that  a 
general  manager  knows  of  them  is  when  they  come  before  him  in  a  list 
of  bills  discounted. 

(3)  The  third  advantage  of  the  Scotch  system  is  that  all  such  ad- 


176  BANKING    AND    COM^rERCE. 

varices  are  accompanied  by,  not  mere  endorsements,  but  by  bonds  of 
guarantee,  drawn  up  in  legal  form,  and  duly  signed,  sealed,  and  de- 
livered. This  has  prevailed  in  Scotland  for  generations,  and  it  is  now 
an  ingrained  habit  of  the  whole  people,  rooted  bj"-  long  continuance,  that 
when  they  want  to  borrow  money  from  a  bank,  they  give  security  for  it 
by  a  bond.  There  is  the  further  advantage  in  giving  security  by  legal 
documents,  that  the  guarantors  cannot  but  feel  the  legal  responsibility 
that  attaches  to  them,  when  instead  of  merely  writing  their  names  across 
the  back  of  a  promissory  note,  often  in  a  very  perfunctory  way,  think- 
ing little  about  it  (and  it  is  undeniable  that  they  do),  they  sign  and  seal 
a  legal  document  in  the  presence  of  one  or  more  witnesses.  The  im- 
portance of  having  endorsers  alive  to  their  responsibilities  has  been  en- 
larged on  already.  Every  banker  is  well  aware  of  it.  There  is  under 
this  system  the  further  important  advantage  to  the  banker  himself,  that 
such  a  document  of  guarantee  can  scarcely  ever  be  forged.  A  branch 
manager  can  never  be  certain  that  the  endorsement  on  a  promissory  note 
i5  genuine,  unless  the  endorser  comes  in  person  and  signs  in  his  presence. 
He  has  been  authorized  to  lend  John  Smith  up  to  $5,000  on  the  endorse- 
ment of  Thomas  Malcolm.  When,  then,  the  customer  brings  promissory 
notes,  apparently  endorsed  by  Thomas  Malcolm,  the  manager  is  apt  to 
be  satisfied.  Yet  Malcolm  may  never  have  signed  at  all.  What  is,  per- 
haps, more  dangerous  still,  although  ^Malcolm  may  have  signed  the 
original  note,  he  may  not  have  signed  the  renewal  of  it.  But  a  bond 
of  guarantee  is  not  only  signed,  generally  by  more  than  one  person,  but 
witnessed  in  the  office  of  the  bank.  This  renders  forgery  practically  im- 
possible.^^ 

There  are  undoubtedly  some  disadvantages  in  the  practical  working 
of  the  system.  One  of  these  is  that  in  case  of  an  account  becoming  un- 
satisfactory, it  is  more  difficult  to  deal  with  than  if  it  was  expressed  by 
one  or  more  promissory  notes,  coming  due  on  definite  days.  If  renewal 
is  desired,  as  it  almost  certainly  will  be  in  such  a  case,  the  opportunity 
arises  of  insisting  upon  payment  or  reduction.  It  is  generally  stipulated 
that  a  cash  credit  shall  be  paid  up  at  least  once  a  year,  but  until  the 
time  for  retirement  comes,  the  tacit  understanding  is  that  advances  shall 
be  continued  without  criticism,  unless  often  overdrawn.  But  when  a 
promissory  note  comes  due  the  opportunity  for  criticism  arises  naturally, 
and  must  be  met. 

Another  point  of  disadvantage  is  that  if  a  customer  is  called  upon 
to  pay  the  balance  against  him,  and  the  amount  is  disputed,  it  is  some- 
times difficult  to  establish  it.  If  a  single  voucher  is  missing,  it  cannot  be 
done.  The  writer  has  a  vivid  recollection  of  a  case  of  this  kind  occurring 
when  he  was  a  young  clerk,  and  of  the  weary  time  he  had,  day  after 
day,  in  the  intervals   of  business,  and    after  bank    hours,    in    laborious 

55  A  rule  has  been  sometimes  adopted  by  n  bank  that  every  endorser  on  a  loan 
note  must  sign  his  name  In  the  presence  of  the  manager.  But  It  has  been  found 
very  difficult  to  carry  It  out  In  practice. 


THE    SCOTCH    SYSTEM.  177 

searching  for  documents  that  had  been  fiJcd  away  months  and  even  years 
before.  Payment  on  his  bond  was  being  demanded  from  a  guarantor, 
but  it  was  necessary,  of  course,  to  establisli  tlie  amount  of  the  debt  before 
a  definite  sum  could  be  demanded  of  him. 

These,  however,  are  trifling  drawbacks,  compared  with  the  great  ad- 
«rantages  attending  the  system;  and  the  writer  has  had  practical  experi- 
ence of  the  working  of  both. 

We  have  in  Canada,  in  various  spheres  of  action,  improved  upon  the 
methods  of  other  countries,  by  adopting  all  their  good  points,  and  leav- 
ing out  or  modifying  what  seemed  to  be  defective.  And,  in  this  matter, 
we  could  undoubtedly  accomplish  it.  For  example,  the  promissory  notes 
representing  advances  should  be  kept  in  entirely  different  registers,  and 
posted  into  entirely  different  liability  ledgers  from  those  relating  to  trade 
bills.  Advances  should  be  entered  in  different  statements,  when  accounts 
are  placed  before  the  board.  Overdrafts  should  be  forbidden  until  se- 
curity is  held,  but  when  allowed,  under  exceptional  circumstances,  an 
accurate  account  should  be  taken  of  them  and  entered  along  with  other 
advances  to  the  same  party  if  any  exist. 

It  might  be  well  to  consider  whether  the  Scotch  system  of  security  by 
guarantee  in  the  case  of  established  credits  might  not  be  substituted  for 
the  prevalent  practice  of  security  by  endorsement.'^^'' 

It  must  not  be  imagined  from  the  foregoing  that  the  trade  bills  offered 
to  a  banker,  either  in  England  or  Canada,  require  no  examination  or 
supervision.  A  striking  instance  given  under  the  head  of  forgeries — which 
occurred  in  Scotland — will  prove  that  they  do  so.  But  the  examination 
and  criticism  of  these  is  conducted  on  entirely  different  principles  from 
those  required  in  judging  advances,  and  it  is  far  less  laborious. 


56  In  fact,  the  law  of  bills  of  exchange  an<l  promissory  notes  might  well  be  re- 
vised so  as  to  place  the  practice  of  endorsement  by  way  of  guarantee  on  an  en- 
tirely different  footing  from  the  endorsement  of  the  owner  of  a  bill.  It  might  be 
enacted  that  an  endorsement  as  guarantee  should  always  be  so  expressed;  as, 
for  example,  in  the  following  form,  or  something  to  the  same  purport:  "For 
valid    consideration    I    hereby    guarantee  payment    of    the    within    promissory    note 

at   maturity.      As    witness   my   hand   and  seal,    at  this  day  of 190.." 

This  understanding  should  be  witnessed  in  the  office  of  the  bank.  It  used  to 
be  held  by  some  English  judges  that  a  promissory  note  was  not  a  negotiable  in- 
strument. They  doubtless  were  thinking  of  a  promissory  note  given  to  represent 
money  borrowed,   and   not  of  a   note   given    in    settlement   of  a  mercantile  account. 


CHAPTER   XXIII. 

BANK  RESERVES. 

Rationale  of  Cash  Reserves — How  Much — Of  What  Character — 
Canadian  Legal  Tender — Proportion  to  be  Kept  by  Banks — 
Other  Forms  of  Reserves — Bank  Balances — Call  Loans — Con- 
ditions AS  TO  Both. 

IT  has  been  pointed  out  that  the  first  idea  of  one  who  has  commenced 
the  business  of  taking  care  of  other  people's  money,  and  has  engaged 

to  repay  it  on  demand,  will  be  to  keep  the  whole  of  it  in  his  safe; 
and  a  humorous  example  of  this  feeling  has  been  given  in  the  address  of 
the  president  of  a  newly-organized  bank  in  the  United  States.  There 
would,  indeed,  be  some  justification  for  this  course;  for  how,  such  a 
banker  might  say,  can  I  possibly  tell  irhen  these  people  will  want  their 
money,  or  how  much  they  will  want,  if  they  need  any  at  all.  Until,  then, 
he  had  arrived  by  experience  at  what  may  be  called  a  law  of  average, 
as  to  the  demands  of  his  customers  (as  a  whole)  from  time  to  time,  he 
would,  if  prudent,  keep  the  larger  part  of  the  money  deposited  with  him 
within  reach.  But  as  time  went  on  such  a  banker  would  arrive  at  this 
general  average,  and  after  providing  for  this,  and  also  for  unforeseen 
emergencies,  would  feel  himself  safe  in  using  the  balance  of  his  deposi- 
tor's funds  in  transactions  yielding  interest. 

Through  such  a  process  as  this  the  whole  business  of  banking  has 
passed,  until  in  the  evolution  of  events  general  rules  and  priniciples  have 
been  arrived  at;  applicable,  some  to  one  condition  of  things  and  some  to 
another.  For  conditions  differ  in  different  countries  and  also  at  differ- 
ent times.  It  is  universally  conceded,  for  example,  that  in  the  case  of 
the  Bank  of  England  a  larger  percentage  of  actual  money  reserve  is 
needful  than  is  the  case  with  an  ordinary  bank;  and  for  this  reason,  that 
the  Bank  of  England  is  the  depository  of  the  spare  money  of  all  the 
banks  in  the  Kingdom.  In  the  balance-sheets  of  all  London  banks  will 
be  found  the  significant  item,  cash  on  hand,  and  in  the  Bank  of  Englarid. 
They  all  keep  large  amounts  of  money  in  the  great  central  institution, 
not  that  they  get  any  interest  for  it,  for  they  do  not,  but  for  the  sake  of 
convenience,  and  partly,  also,  for  safety. 

But  these  London  banks  are  themselves  custodians  of  the  spare  funds 
of  the  banks  of  the  interior,  all  of  whom  keep  accounts  with  a  London 
bank,  and  usually  have  large  amounts  of  their  reserve  money  lodged  with 
them.  It  thus  has  come  about,  by  a  gradual  evolutionary  process,  that 
much  of  the  reserve  money  of  the  whole  Kingdom  is  in  the  shape  of  bal- 
ances due  by  the  Bank  of  England;  a  fact  which  at  once  suggests  that 

178 


BANK    RESERVES.  179 

the  great  national  institution  should  keep  a  far  larger  proportion  of  such 
balances  in  actual  gold  in  its  vaults  than  would  be  necessary  if  its  de- 
positors were  wholly  mercantile. 

But  at  this  point  another  consideration  arises,  viz.,  of  what  should 
this  actual  money  consist.^  The  answer  to  this  question  involves  another, 
viz.,  what  is  considered  to  be  actual  money ;  that  is,  what  are  all  persons 
bound  to  receive  as  such  according  to  the  law  of  England  or  of  any  other 
country.^  Within  the  Bank  of  England  itself  the  only  money  which  it 
can  tender  in  response  to  a  demand  is  gold  coin.  This  is  the  only 
LEGAL  TENDER  for  the  Bank.  But  the  law  of  England  has  provided  that 
the  notes  of  the  Bank  of  England  are  themselves  legal  tender  every- 
where except  at  the  counter  of  the  Bank  itself.  These  notes  are  simply 
the  promises  of  the  corporation  to  pay  a  given  number  of  pounds  on  de- 
mand; but  it  would  obviously  be  absurd  for  the  Bank  to  be  able,  legally, 
to  pay  its  own  promises  with  its  own  promises.  This  would  make  them 
irredeemable,  in  which  case  they  would  infallibly  go  to  a  discount.  The 
Bank  must  perforce  pay  in  gold,  if  payment  is  demanded.  Gold,  of 
course,  is  legal  tender  if  any  other  bank  or  person  chooses  to  tender  it. 
Silver  coins  are  recognized  as  legal  tender  also,  but  only  to  the  extent  of 
two  pounds — an  amount  evidently  fixed  as  the  sum  an  individual  can 
carry  about  with  him,  or  wherewith  a  laborer's  wages  can  be  paid,  or  small 
change  made.  It  is,  however,  entirely  unsuitable  for  the  larger  purposes 
of  trade  and  commerce. 

Gold,  therefore,  is  the  final  legal  money  of  England  (but  Bank  of 
England  notes  are  not  legal  tender  in  Scotland),  and  as  the  Bank  of 
England  is  the  only  place  where  no  other  money  will  answer  lawful  de- 
mands, this  Bank  is  the  great  reservoir  of  gold  for  the  country.  Every 
other  bank  in  the  Kingdom  can  keep  its  available  reserve  in  Bank  of 
England  notes,  and  with  them  discharge  all  lawful  obligations.  But  as 
no  bank  notes  in  England  are  less  than  five  pounds,  a  large  amount  of 
gold  coin  must  necessarily  be  kept  for  the  requirements  of  business. 

It  has  come,  therefore,  to  be  universally  understood  that  the  percent- 
age of  the  reserve  of  the  Bank  shall  be  on  a  far  higher  scale  than  is  con- 
sidered necessary  for  an  ordinary  institution.  It  generally  ranges  from 
forty  to  fifty  per  cent,  of  the  Bank's  liabilities,  and  is  watched  by  the 
whole  financial  world  with  as  much  care,  and  sometimes  with  as  much 
anxiety,  as  the  weather  is  by  a  farmer  or  a  navigator. 

For  ordinary  banks  it  has  come  to  be  recognized,  as  the  result  of  wide 
experience,  that  a  cash  reserve  of  about  twenty-five  per  cent,  of  liabilities 
is  sufficient  for  ordinary  purposes;  with  the  proviso,  however,  that  a  sort 
of  secondary  reserve  shall  be  held  for  emergencies  in  the  shape  of  in- 
vestments. The  latter  is  fully  of  treated  later  on.  The  proportion  of 
twenty-five  per  cent,  has  been  adopted  in  the  banking  law  of  the  United 
States  as  the  standard  to  which  all  the  national  banks  located  in  "central 
reserve  cities"  and  "reserve  cities"  must  conform.  That  amount  of  avail- 
able reserve  they  are  bound  to  keep.     But  the  banks  of  Canada,  though 


180  BANKING    AND    COMMERCE. 

fully  recognizing  this  percentage  as   a  reasonable  one,  have  always  de- 
clined to  have  it  made  compulsory,  for  reasons  set  forth  in  other  chapters. 

Character  of  the  Reserve. 

Assuming,  then,  that  this  amount  may  be  reasonable  for  a  bank  to 
keep,  the  question  may  fairly  be  raised  as  to  the  precise  shape  in  which 
such  a  reserve  should  be  held.  This  brings  us  to  the  question  of  what  is 
legal-tender  money  in  Canada.^ 

It  is  to  the  credit  of  Canadian  financiers  and  bankers  that  they  have 
always  maintained  that  gold  is  the  only  proper  basis  for  a  monetary 
system,  refusing  to  be  drawn  away  by  the  plausible  arguments,  at  one 
time  so  general  in  the  United  States,  in  favor  of  a  double  standard.  And 
whatever  may  have  been  the  case  in  the  early  days  of  settlement,  it  is 
crtain  that  for  more  than  sixty  years  past  the  single  standard  of  gold  as 
legal  tender  has  been  resolutely  maintained.  The  only  time  when  specie 
payments  were  ever  suspended  in  any  of  the  British  Provinces  was  when 
tlie  country  was  in  a  state  of  civil  war.     This  was  in  1837. 

But  about  forty  years  ago — or  immediately  after  Confederation — a 
strenuous  attempt  was  made  to  introduce  a  Government  currency  which 
would  operate  somewhat  as  that  of  the  Bank  of  England  does  in  Eng- 
land. These  Government  notes  were  to  be  legal  tender,  except  at  the 
Government  Treasury.  There  they  were  to  be  redeemable,  on  demand, 
in  gold.  Under  this  measure  it  was  intended  to  abolish  bank-note  cir- 
culation altogether.  The  majority  of  the  banks,  however,  strenuously 
resisted  this;  and  after  a  controversy  extending  over  several  sessions  of 
Parliament,  a  compromise  was  finally  agreed  to,  by  the  terms  of  which 
the  banks  retained  the  right  to  issue  notes  to  the  extent  of  their  capital. 
An  act  was  passed  authorizing  the  issue  of  Government  notes,  but  only 
of  small  denominations,  for  general  circulation ;  and  also  of  notes  of  large 
denominations  for  use  between  banks  in  settlement  of  claims  against  each 
other.  Both  alike  were  to  be  redeemable  in  gold.  The  final  basis,  there- 
fore, in  the  country  was  still  to  be  gold. 

In  connection  with  this  an  important  clause  was  introduced  into  the 
Banking  Act,  which  ensured  that  the  banks,  at  all  times,  should  hold 
large  amounts  of  these  Government  notes.  The  clause  was  this,  that 
whatever  amount  each  bank  might  hold  from  time  to  time,  as  a  cash  re- 
serve, at  least  forty  per  cent,  thereof  should  consist  of  Government  notes. 
Being  then  under  obligation  to  hold  such  large  amounts,  it  became  a  mat- 
ter of  vital  importance  to  the  banks  that  this  currency  should  never  fail 
to  be  redeemable  in  gold  on  demand.  When,  therefore,  the  Dominion 
Note  Act  was  passed,  the  bankers  of  the  day,  in  conference  with  the 
Government,  pressed  strenuously  for  a  broad  foundation  of  actual  gold, 
to  be  always  available  in  the  Treasury,  and  that  Government  bonds,  duly 
authorized  by  Parliament,  should  be  held  for  the  balance.  These  ideas 
were  acquiesced  in  by  the  Government,  and  on  this  foundation  the  legal- 
tender  notes  of  Canada  have  ever  since  rested.      It  is  important  to  note 


BANK    RESERVES.  181 

that  there  has  never  been  an  occasion  in  which  the  Treasury  failed  to 
respond  instantly  to  any  demand  for  gold  made  upon  it.''^ 

Thus,  then,  we  arrive  at  the  mode  in  which  the  banks  of  Canada  deal 
with  their  cash  reserve.  All  their  instincts  as  bankers  and  all  the  tradi- 
tions that  influence  them,  would  lead  them  to  keep  their  cash  reserves 
wholly  in  gold  coin,  and  to  make  their  clearing-house  settlements  in  that 
medium.  This  they  actually  did  until  the  Dominion  Note  Act  was  passed. 
But  as  the  law  of  their  organization  binds  them  to  keep  at  least  forty 
per  cent,  in  Government  notes,  and  this  under  heavy  penalties,  they  do, 
as  a  matter  of  fact,  keep  more.  How  much  more  is  left  to  their  own 
discretion  and  convenience.  Notes  of  large  denominations  are,  of  course, 
much  more  convenient  to  handle  than  the  bags  of  gold  they  were  formerly 
accustomed  to  carry  about.  And  being  well  convinced  that  these  notes 
are  perfectly  safe,  long  experience  having  proved  that  gold  can  be  had 
for  them  whenever  Avanted,  the  banks  have  settled  down  into  a  general 
practice  of  keeping  much  larger  amounts  of  such  notes  than  they  are 
bound  to  do. 

There  arc,  however,  two  drawbacks.  It  is  much  easier  to  steal  and 
to  hide  such  notes  than  it  is  to  steal  gold.  Gold  is  so  heavy  that  it  is 
practically  impossible  for  a  thief  to  carry  it  away.  A  theft  of  bags  of 
gold  has  never  occurred  in  the  experience  of  banks  of  Canada,  although 
it  has  been  knoAvn  that  bars  of  specie  have  been  stolen  in  transmission 
across  the  Atlantic  and  the  Continent.  The  second  drawback  arises  from 
the  fact  that  all  engraved  notes  can  be  imitated  and  forged ;  a  very  prac- 
tical danger,  as  experience  has  proved.  In  view  of  both  these  possibili- 
ties, the  Government,  after  consultation  with  the  officers  of  banks,  have 
adopted  special  precautions  in  the  matter,  making  it  almost  impossible 
for  the  large  notes  to  be  used  in  any  way  except  between  banks,  and  thus 
practically  useless  to  a  thief  or  embezzler.  As  to  the  smaller  ones,  as 
none  can  be  issued  above  four  dollars,  it  is  not  worth  while  to  attempt  to 
counterfeit  them. 

The  banks,  it  will  be  observed,  under  this  system  are  under  no  obliga- 
tion to  keep  gold  at  all.  Every  demand  made  upon  them  can  be  satis- 
fied with  legal-tender  notes.  But  as  a  matter  of  fact  all  the  banks  do 
keep  a  portion  of  their  cash  in  gold,  as  may  be  seen  by  the  returns  made 
to  the  Government.  There  has  never  been  an  issue  of  these  returns  in 
which  any  bank  reported  that  it  carried  no  gold.  Now,  for  this  course 
there  have  been  several  reasons.  The  first  is  that  they  are  sometimes 
asked  for  gold  by  customers  who  are  travelling,  or  who  have  a  use  for 

57  The  liasis,  it  will  be  percoivcd.  is  analogous  to  that  of  the  Bank  of  England. 
That  Bank  is  popularly  supposed  to  hold  actual  coin  against  every  note  passing 
over  the  counter  of  Its  issue  department.  But  this  is  a  fallacy.  The  Bank  Is  au- 
thorized to  issue  notes  against  the  large  amount  of  Government  bonds  which  rep- 
resent Its  own  capital.  Thus,  Bank  of  England  notes,  like  those  of  the  Gov- 
ernment of  Canada,  rest  partly  upon  a  strictly-defined  amount  of  Government 
bonds,  and  partly  upon  gold.  It  should  be  noted  further,  that  the  Dominion  Note 
Act  strictly  limits  the  amount  of  notes  that  may  be  Issued  against  Government 
securities,  and  ordains  that  for  any  excess  beyond  this  amount  dollar  for  dollar 
shall  be  held  in  actual  gold  coin. 


182  RANKING    AND    COMMERCE. 

gold,  at  times,  in  the  transaction  of  business.  These  demands,  however, 
are  always  very  slight.  Another  reason  for  keeping  gold  is  that  in  cer- 
tain conditions  of  exchange  with  Great  Britain  and  also  with  the  United 
States  it  is  the  most  profitable  medium  of  remittance.  This,  however, 
does  not,  as  a  rule  call  for  what  mav  be  called  large  amounts,  that  is,  in 
proportion  to  the  total  reserves  of  the  bank. 

A  'third  is,  that  long  and  traditional  habits  with  Canadian  bankers 
have  led  them  to  value  gold  as  the  final  foundation  of  all  their  transac- 
tions, and  to  keep  as  much  of  it  as  they  can  with  convenience  and  under 
compliance  with  the  law.  It  may  be  truthfully  said,  that  in  spite  of  the 
great  convenience  of  legal-tender  notes  in  practice,  there  is  not  a  Cana- 
dian banker  but  would  feel  more  satisfaction  in  carrying  gold  in  his 
vaults  to  represent  the  whole  of  the  cash  reserve.  Another  reason  (rather 
a  remote  one  in  practice)  why  the  banks  keep  a  certain  supply  of  gold  is, 
that  on  the  rare  occasions  that  a  "run"  takes  place  on  any  of  them,  nothing 
will  satisfy  demands  as  effectually  as  gold.  Indeed,  it  has  been  known 
more  than  once,  in  the  experience  of  both  sides  of  the  Atlantic,  that  the 
mere  piling  up  of  gold  on  the  counter  in  sight  of  all  and  sundry  who 
came,  has  been  sufficient  to  stop  a  "run"  altogether.  Fifty  thousand  dol- 
lars is  the  merest  fraction  of  the  reserve  of  most  of  our  banks,  but  fifty 
tliousand  dollars  in  gold  coins,  piled  up  on  the  counter  in  front  of  a  pay- 
ing teller  will  generally  satisfy  all  but  the  most  nervous  applicants. 
When  the  people  see  so  much  gold  they  are  ashamed  to  ask  for  it. 

But  now,  granting  that  the  cash  reserves  of  the  bank  must,  of  neces- 
sity, consist  partly  of  legal-tender  notes,  and  assuming  that  twenty-five 
per  cent,  of  liabilities  may  be  considered  a  normal  amount,  why  should 
not  a  bank  keep  the  whole  of  this  percentage  in  Government  notes  and 
gold.''  That  none  of  the  Canadian  banks  do  this  is  known  to  all  who 
examine  their  statements  to  the  Government.  On  the  other  hand  it  is 
equally  well  known  that  the  sum  total  of  what  the  banks  call  their  avail- 
able reserves  is,  as  a  rule,  far  beyond  the  twenty-five  per  cent.,  and  is 
more  frequently  as  much  as  fifty  per  cent. 

A  critic,  however,  may  say,  that  as  the  liabilities  of  the  bank  are  all 
payable  in  legal  tender  or  gold,  why  not  keep  this  twenty-five  per  cent, 
at  any  rate  in  this  solid  shape?  Demands  are  daily  made  on  the  banks 
by  other  banks,  and  it  is  certain  such  demands  cannot  be  satisfied  by  ten- 
der of  balances  due  from  banks  abroad  or  by  call  loans.  "N^Hiy  then  not 
keep  in  the  vault  the  kind  of  material  which  can  be  used  on  the  spot? 
This  is  a  very  reasonable  question,  to  which  every  banker  is  bound  to 
give  reasonable  consideration,  with  a  view  to  satisfying  not  only  himself 
but  the  banking  community  and  the  public  generally.  For,  in  any 
country,  none  are  so  much  interested  as  bankers  in  the  stability  of  banks 
as  a  wliole.  But  this  is  more  particularly  the  case  in  Canada,  where, 
under  the  operation  of  the  "redemption  fund,"  all  the  banks  are  practi- 
cally guarantors  of  each  other's  notes.  No  persons  watch  the  returns  of 
U»e  reserves  of  the  banks  with  so  much  care  as  bankers  do.     But  with  tar 


BANK    RESERVES.  183 

more  care  do  prudent  bankers  watch  the  fluctuations  in  their  own  re- 
serves. The  amount  and  the  percentage  of  his  available  resources  is  a 
matter  of  daily  consideration  and  examination  by  every  banker.  And 
just  as  the  amount  of  the  reserves  is  so  considered,  so  is  their  character. 
If  any  banker  had  concluded,  as  the  fruit  of  reasoning  and  experience, 
that  it  was  necessary  to  keep  the  whole  percentage  of  his  reserves  in  gold 
and  Government  notes,  he  would  undoubtedly  do  it.  But  practical  ex- 
perience— and  that  extended  over  a  long  period  and  through  varied  cir- 
cumstances— has  convinced  most  bankers  that  the  requirements  of  safety 
can  be  fully  met  by  kee])ing  considerable  sums  deposited,  at  credit  with 
banking  agents,  in  one  or  more  great  financial  centres.  Thus  it  is,  as 
has  been  observed,  that  English  country  bankers  keep  so  much  of  their 
cash  in  the  hands  of  their  London  agents,  while  these  agents,  in  their 
turn,  keep  a  large  part  of  their  cash  in  the  vaults  of  the  Bank  of  Eng- 
land. The  same  principle  obtains  in  the  requirements  of  the  United 
States  banking  law,  which,  rigid  as  they  are,  as  to  the  total  amount,  allow 
considerable  portions  of  such  reserves  to  be  deposited  with  banks  in  large 
centres. 

Now,  in  considering  the  application  of  this  general  principle  to  Cana- 
dian banks,  let  it  be  noticed  that  the  requirements  of  their  business  call 
for  them  all  to  have  accounts  with  bankers  in  at  least  two  financial  cen- 
tres— New  York  and  London ;  and  in  some  cases  with  Boston  also.  With- 
out such  arrangements  they  could  not  meet  the  requirements  of  their  cus- 
tomers, nor  make  the  collections  required  in  the  course  of  business.  The 
trade  between  Canada  and  the  United  States  is,  as  we  all  know,  of  im- 
mense magnitude;  but  it  is  not  so  well  understood  that  this  immense  trade 
is  all  represented  by  banking  transactions  of  equal  magnitude.  Now, 
New  York  is  the  financial  centre  of  the  American  Continent,  and  all  these 
transactions  finally  centre  there.  Money  flows  to  New  York  and  flows 
out  from  New  York  in  large  sums  (only  a  small  part,  however,  in  actual 
coin),  according  as  the  exigencies  of  commerce  arise.  Canada  is  in- 
cluded within  the  area  of  these  operations,  and  the  Canadian  banks,  in 
furtherance  of  them,  must  of  necessity  keep  large  supplies  of  money  in 
New  York  at  immediate  call.  These  balances  with  banks  in  New  York 
as  a  financial  centre  correspond  with  the  balances  kept  by  provincial  and 
Scotch  banks  in  London.  And  experience  has  demonstrated  that  the 
money  a  Canadian  banker  has  with  his  banking  agent  in  New  York  is 
almost  as  available  as  if  he  had  locked  it  up  in  his  safe.  He  can  make 
it  available  in  the  intercourse  of  banks  by  drafts,  for  which  he  can  obtain 
legal  tenders  on  the  sjiot,  if  he  needs  them.  It  has  thus  come  about  that 
bankers  in  Canada  have  come  to  regard  cash  to  their  credit  in  a  New 
York  bank  as  a  part  of  their  cash  reserves. 

Utilization  of  Spare  Funds. 
There  are,  however,  other  considerations  connected  with  this  matter. 
Whilst  the  first  instinct  of  every  banker  is  to  keep  himself  safe,  under  all 


184  BANKING    AND    COMMERCE. 

circumstances,  it  is  equally  his  instinct  to  endeavor  to  make  as  much  profit 
as  he  can  out  of  the  funds  at  his  daily  command.  This  has  long  led  to 
the  consideration  whether  spare  funds  cannot  be  so  employed  as  to  yield 
some  interest,  and  yet  be  absolutely  safe  and  at  command  when  wanted. 
It  is  obviously  only  in  great  financial  centres,  where  vast  masses  of  money 
are  constantly  to  be  found,  that  such  operations  could  be  devised;  accord- 
ingly, it  is  only  in  London  and  New  York  where  they  are  developed  to 
any  large  extent.  They  are  found  indeed,  but  only  to  a  limited  degree,  in 
smaller  financial  centres.  Now,  in  London,  for  one  or  two  generations 
back,  the  balance-sheet  of  every  bank  has  contained  amongst  its  assets  this 
significant  item,  loans  at  call,  the  significance  being  that  this  item  was 
invariably  included  as  a  part  of  the  cash  reserve  of  the  bank  and  not 
amongst  its  loans  or  investments.  Cash  on  hand,  in  Bank  of  England,  or 
at  call;  this  form,  slightly  varied  as  it  may  be,  but  the  same  in  substance, 
has  appeared  in  every  London  bank  statement  for  fifty  years.  And  the 
fact  that  it  has  so  continued  and  is  in  full  force  to  this  day,  is  proof  that 
it  has  worked  satisfactorily. 

The  same  conditions  that  have  prevailed  in  London  have  also  arisen, 
and  had  influence  in  New  York.  Money  can  be  loaned  there  with  a  large 
margin  of  security  and  with  an  assurance  of  being  returned  on  demand, 
to  a  class  of  borrowers  of  high  standing.  It  has  been  so  for  a  sufficiently 
long  term  of  years  to  enable  the  system  to  be  tested.  And  as  it  has 
yielded  similar  satisfactory  results,  the  banks  have  steadily  followed  the 
course  purused  in  London  and  placed  money  out  on  call,  repayable  on 
demand,  with  a  large  margin  of  security,  taking  for  it  whatever  rate  may 
be  current  at  the  time.  And  long  experience,  in  every  variety  of  circum- 
stances, even  in  sharp  crises,  has  proved  to  bankers  that  they  can  do  this 
with  assurance  of  receiving  it  when  wanted.  The  bankers  of  Canada 
well  know  the  importance  of  having  their  ordinary  reserves  at  absolute 
command;  and  if  at  any  time  any  events  had  transpired  which  cast  a 
shade  of  uncertainty  over  this  fundamental  requirement,  it  would  have 
been  discontinued  beyond  doubt. ■^'' 

Much  that  has  been  observed  with  regard  to  placing  spare  money 
and  keeping  part  of  a  banker's  cash  reserves  in  New  York  applies  equally 
to  London.  The  whole  trade  between  Canada  and  Great  Britain  gives 
rise  to  banking  transactions  in  the  shape  of  sterling  bills  of  exchange  or 
transfers  of  money  by  cable.     Indeed,  if  the  amount  of  such  bills  passing 

58  There  are,  however,  call  loans  put  out  In  smaller  centres  of  finance  than  New 
York  or  London.  In  fact,  wherever  there  Is  a  stock  exchanse,  of  sufficient  magni- 
tude to  give  rise  to  large  daily  transactions,  there  is  the  opportunity  of  placing 
out  money  strictly  at  call,  on  ".he  security  of  stocks  and  bonds.  But  bankers  are 
well  aware  of  the  difference  between  such  small  centres  and  those  of  continental 
or  world-wide  magnitude  like  New  York  or  London.  This  difference  i.s  not  so 
much  in  the  safevy  of  the  loans  as  in  the  certainty  of  repayment  of  large  amounts 
Immediately  on  call.  It  has  consequently  been  the  practice,  especially  by  the 
larger  banks,  to  place  a  limit  on  the  amount  of  money  they  loan  at  call  in  smaller 
centrfs.  re.sfrving  the  larger  operations  for  New  York  or  London.  But  as  to  safety^ 
there  Is  r«  much  of   this  in  the  j-maller  centres  as  the  larger. 


BANK    RESERVES.  185 

through  the  hands  of  the  bankers  that  have  to  do  with  them  could  be  as- 
certained, it  would  be  found  to  afford  a  very  fair  idea  of  the  trade  be- 
tween Canada  and  the  mother  country.  All  these  transactions  finally 
centre  in  London.  It  is  a  matter  of  necessity,  therefore,  with  all  Cana- 
dian banks  to  keep  an  account  with  a  bank  in  London,  and  to  have  money 
at  command  there.  With  the  majority  of  the  banks,  balances  with  their 
bankers  comprise  the  whole  of  the  arrangements  they  have  in  that  centre. 
But  several  of  the  larger  ones  have  an  office  of  their  own  in  London  and 
can,  if  desirable,  place  money  on  call  there  as  they  do  in  New  York.  '' 

Thus  balances  and  items  are  created,  which  appear  in  bank  state- 
ments either  as  balances  due  from  banks  in  Great  Britain,  or  call  loans 
put  out  on  that  market. 

We  thus  arrive  at  the  three  modes  in  which  a  banker's  cash  reserve 
may  be  held:  First,  in  gold  or  legal-tender  notes,  in  his  own  possession; 
second,  cash  balances  due  on  demand  from  other  banks,  generally  in  New 
York  and  London,  but  sometimes  in  smaller  centres;  third,  cash,  payable 
on  demand — or  it  may  be  at  one  or  two  days'  notice — loaned  to  stock 
brokers  with  stocks  or  bonds  as  security,  and  a  margin. 

It  is  the  last  two  items  that  give  rise  to  criticism,  and  the  criticism 
is,  either  that  the  banker  from  whom  money  is  due  may  become  embar- 
rassed and  fail  to  respond  at  once,  or  that  the  parties  who  have  borrowed 
money  on  call  may  also  fail  to  respond  and  compel  the  banker  to  realize 
his  loan  by  selling  securities.  This,  of  course,  would  cause  delay,  and 
thus  make  such  transactions  undesirable  as  cash  reserves.  To  all  which 
it  is  sufficient  to  reply  that  time  and  experience  test  all  things.  When 
brought  to  this  test,  both  these  modes  of  placing  money  have  been  demon- 
strated to  be  successful.  As  to  balances  due  from  banks  in  large  centres, 
there  has  hardly  been  known  an  instance,  amongst  the  countless  multi- 
tude of  transactions  in  which  any  New  York  bank  failed  to  respond  to 
demands.  Not  that  no  bank  has  ever  failed  in  New  York,  for  some  sec- 
ond-rate concerns  have  stopped  payment.  But  none  of  the  large  corpo- 
rations, with  whom  the  Canadian  banks  are  in  the  habit  of  keeping  ac- 
counts, have  ever  failed  to  respond  to  demand.  It  is  needless  to  say  that 
the  same  observation  applies  also  to  London.  But  it  may  be  a  matter  of 
surprise  to  those  not  acquainted  with  the  subject  to  learn  that  there  has 
scarcely  ever  been  an  instance,  amongst  the  countless  transactions  in  call 
loans,  when  a  delay,  even  for  a  day,  has  occurred  in  responding,  and  that 
an  actual  loss  of  such  money  has  scarcely  ever  been  heard  of.  Thus, 
time  and   experience  have  both   proved   that,  for  all   practical   purposes, 

59"  It  is  well  known,  also,  that  London  barks  are  quite  willing,  and  have  been  so 
for  a  long  period,  to  allow  Canadian  banks  a  standing  credit,  that  may  be  availed 
of  or  drawn  for  according  to  terms  agreed  upon.  This  credit  cannot  be  looked, 
upon  as  part  of  a  bank's  cash  reserve,  as  a  balance  at  credit  would  be.  but  It  may 
be  considered  as  a  secondary  line  of  defence  against  emergencies,  somewhat  In 
the  same  manner  as  we  have  shown  Investments  to  be  in  the  next  chapter.  For 
money  can  be  obtained  against  such  a  credit,  by  a  Canadian  banker  at  any  time. 
within  twenty-four  hours. 


186  BANKING    AND    COMMERCE. 

moneys  due  by  bankers  in  financial  centres,  and  cash  placed  out  on  call, 
are  both  available  at  any  time  witliin  twenty- four  hours. ^° 

There  are,  of  course,  occasions  during  which  the  signs  of  threatened 
disturbance  in  financial  matters  have  become  so  serious  that  bankers  have 
thought  it  prudent  to  draw  in  balances  due  them  by  other  banks,  and  to 
call  in  the  money  they  placed  out  at  call.  Such  a  time,  for  example,  was 
to  be  found  when  what  was  known  as  the  "silver  agitation"  rose  to  such 
a  height  in  the  United  States  as  to  become  the  main  factor  in  a  Presiden- 
tial contest.  Canadian  bankers  well  knew  the  dangers  involved  in  this 
question,  and  were  convinced  that  gold  would  rise  to  a  premium  if  the 
views  of  certain  parties  prevailed.  Tliey  had  previously  taken  the  pre- 
caution to  have  all  their  contracts  for  loans  at  call  made  payable  in  gold; 
but  in  addition  to  this  it  was  thought  desirable  by  some  to  draw  away 
money  altogether  from  the  scene  of  possible  disturbance,  leaving  only 
such  balances  as  were  absolutely  necessary  for  the  conduct  of  business. 

This  matter  is  of  interest  to  merchants  as  well  as  bankers.  For  they 
should  undoubtedly  so  manage  their  affairs  as  to  have  a  reserve  of  cash 
— in  hand,  or  in  bank,  or  bills  undiscounted,  or  a  reserve  of  credit  un- 
drawn upon  with  their  banker.  If  not,  they  may  be  compelled  to  stop 
payment,  even  though  solvent. 

60  It  may  seem  strange  that  a  banker  can  reckon  upon  money  at  his  credit  in 
London  being  as  much  at  his  command  as  if  he  had  it  deposited  in  a  bank  in  New 
York.  But  to  such  perfection  have  exchange  operations  between  these  financial 
centres  been  brought  that  bills  of  exchange,  either  at  sight  or  time,  can  at  once  be 
negotiated  and  the  amount  placed  to  credit,  with  as  little  loss  of  time  as  it  would 
take  for  a  merchant  to  draw  a  check  on  his  own  bank  in  the  same  city.  And 
If  an  exacting  critic  should  object  that  this  is  not  a  sufflcient  reliance  in  such  an 
Important  matter  as  cash  reserves,  Inasmuch  as  financial  disturbances  would  im- 
pede its  operation,  the  reply  must  be  that  experience  >loes  not  justify  this  con- 
tention. There  has  never  been  a  time  in  the  heaviest  crisis  in  which  money  could 
not  be  transferred  from  London  to  New  York  or  Montreal  by  means  of  bills  of 
exchange,  or  cable  transfers.  The  only  difference  between  the  transferring  of 
money  in  a  crisis  and  in  an  ordinary  time  is  in  the  rate  of  exchange. 


CHAPTER    XXI r. 
BANK  INVESTMENTS  AS  RESERVES.  . 

Reserves  Against  Emergencies — Should  Be   Negotiable  and  Avail- 
able— Reserves   of   a   London    Bank — Comments   Thereon. 

CLOSELY  connected  with  the  keeping  of  adequate  reserves  of  cash 
for  daily  needs  is  that  of  maintaining  what  may  be  called  a  second 
line  of  safety  and  defence  in  the  shape  of  Investments.  These 
investments  must,  in  the  nature  of  things,  if  they  are  to  answer  the  pur- 
pose, consist  of  securities  that  can  at  all  times  be  easily  realized.  This 
primary  condition  arises  out  of  the  necessities  of  a  banker's  business,  and 
at  once  dift'crentiatcs  his  investments  from  those  of  a  private  individual. 
Such  an  individual  has  no  large  body  of  persons  about  him  to  whom  he  is 
indebted,  whose  funds  have  been  lodged  with  him  in  trust,  some  of  whom 
are  making  demands  upon  him  every  day  in  the  regular  course  of  busi- 
ness, and  all  of  whom  are  resting  upon  the  honor  and  wisdom  of  their 
banker  to  answer  not  only  ordinary  demands,  but  extraordinary  ones. 
This  is  the  first  principle  that  dominates  every  movement  that  a  banker 
makes,  and  in  nothing  is  it  so  operative  as  in  the  selection  of  securities 
for  investment. 

In  fact,  the  word  "investment,"  as  used  in  reference  to  a  banker's 
business,  has  a  radically  different  meaning  from  that  which  appertains  to 
it  in  ordinary  use.  When  a  private  individual  thinks  of  making  an 
investment,  the  primary  condition  lie  thinks  of  is  permanence.  If  he  is 
likely  to  want  the  money  he  has  at  his  command,  he  keeps  it  in  the  bank. 
But  when  the  need  is  for  steady  interest  and  security  of  principal,  he 
takes  it  out  of  bank  and  buys  something  that  can  rest  undisturbed,  per- 
haps for  years.  He  can  purchase  real  estate,  or  take  an  interest  in  a 
well-established  business,  or  lend  money  on  mortgage  for  long  terms. 
If  he  becomes  a  stockholder  in  a  bank  or  other  company,  he  thinks  not  of 
the  realizableness  of  the  security,  but  of  the  permanence  of  the  corpora- 
tion.    And  he  acts  with  regard  to  investing  in  bonds  on  the  same  rule. 

But  with  a  banker  this  idea  of  permanence  is  out  of  place.  His  in- 
vestments, so  called,  are  really  a  part  of  his  fund  to  meet  liabilities.  But 
not  his  ordinary  and  daily  recurring  liabilities,  but  such  as  are  extraor- 
dinary, which  arise  under  special  circumstances  and  at  intervals  of  time, 
such,  for  example,  as  when  a  bad  harvest  causes  scarcity  of  money  and  a 
heavier  demand  for  it  both  from  depositors  and  mercantile  customers,  or 
when  a  season  of  bad  trade  supervenes  and  continues  year  after  year  with 
the  same  result. 

If  a  banker's  whole  spare  resources  are  employed  in  discounting  bills 
and  making  business  loans,  he  will  find  when  such  a  time  supervenes,  and 
a  drain  of  deposits  or  contraction  of  circulation  sets  in,  that  hte  cannot 
reduce  his  discounts  without  embarrassing  his  customers.     In  fact,  at  such 

187 


188  BANKING    AND    COMMERCE. 

a  time  the  majority  of  his  commercial  customers  could  not  respond  at  all 
to  his  demands  for  reduction.  Instead  of  that  they  will  want  more 
money  from  him.  Thus,  instead  of  his  being  a  tower  of  strength  to  the 
circle  who  do  business  with  him,  he  may  become  weak  himself. 

The  Investments  of  an  English  Bank. 

Experienced  bankers  in  old  financial  centres  like  those  of  Great  Brit- 
ain have,  therefore,  long  found  the  necessity  of  placing  out  a  certain 
percentage  of  their  resources  in  securities  which  can  be  realized  without 
disturbance.  In  all  the  statements  of  English  and  Scotch  banks,  but  of 
the  London  ones  especially,  we  find  the  item  of  securities  owned  by  the 
bank  figuring  prominently.  These  securities,  let  it  be  observed,  are  the 
actual  property  of  the  bank  and  must  not  be  confounded  with  call  loans. 

Take,  for  example,  the  following,  which  may  be  looked  upon  as  a 
typical  instance,  inasmuch  as  the  bank  in  question  combines  within  itself 
almost  every  description  of  bank  business  as  carried  on  throughout  Eng- 
land. With  its  head  office  in  London,  where  the  firm  of  Barclay  Bevan 
&  Co.  was  for  generations  known  as  one  of  the  most  conservative  (and 
jet  most  prosperous)  of  the  great  banks  of  the  metropolis,  it  is  now  a 
joint  stock  corporation  (under  the  name  of  Barclay  &  Co.,  Limited),  in 
perfect  touch  with  the  commercial  interests  of  the  whole  country,  its  cus- 
tomers representing  every  class  and  interest. 

The  paid-up  capital  of  the  bank  is  $12,100,000  (the  figures  are  given 
in  dollars  that  they  may  be  the  more  easily  followed).  The  capital,  of 
course,  can  never  be  demanded,  and  though  sometimes  considered  as  a 
liability  for  bookkeeping  purposes,  it  is  a  great  error  to  include  it  along 
with  such  liabilities   as  can  be  demanded. 

But  when  we  look  at  the  item  of  deposits,  that  is,  of  moneys  that 
can  be  actually  called  for,  we  are  struck  at  once  with  the  enormous 
amount.  Deposits  amount  to  $165,318,000.  The  reserve  to  meet 
this  immense  total  consists,  in  the  first  instance,  of  cash  in  hand,  or  in 
the  Bank  of  England,  or  out  on  call  or  short  notice,  $4-4,235,225. 

This  is  what  we  have  described  as  the  ordinary  reserve,  kept  against 
ordinary  demands.  But  the  bank  has  a  provision  for  extraordinary  de- 
mands also,  in  the  shape  of  investments  to  the  amount  of  $i3,6l'2,735, 
being  nearly  the  same  amount  as  the  ordinary  reserve. 

These  investments  are  summarized  as  follows  in  the  balance  sheet  of 
the  bank: 

1.  British  Government  securities  and  Bank  of 

England   stock    $18,613,000 

2.  Metropolitan  and  British  corporation. stocks 

and   bonds    3,928,000 

3.  Indian  and  Colonial  Government  securities, 

including  guaranteed  railways 7,550,000 

4.  British   railway  debentures   and   guaranteed 

and  preference  stocks 5,592,000 

5.  Other  securities    7,928,000 


r.AXK    INVESTMENTS    AS    RESERVES.  189 

It  will  be  apparent  at  once  that  tliese  fulfil  the  essential  requirements 
of"  availability.  They  can  be  realized  on  as  may  be  required  within  a  short 
time,  and  so  enable  the  bank  to  meet  extraordinary  demands  without  dis- 
turbance to  those  mercantile  customers  who  depend  upon  it  for  supplies. 

In  looking  over  this  summary  of  investments  it  is  interesting  to  no- 
tice one  or  two  points  as  to  their  classification.  Thus,  for  example, 
while  the  leading  position  is  given  to  Consols  and  other  British  Govern- 
ment securities,  it  is  curious  to  note  that  Bank  of  England  stoch  is 
grouped  with  them,  thus  placing  the  Bank  of  England,  in  point  of  sta- 
bility and  credit,  on  a  par  with  the  British  Government  itself.  This, 
of  course,  reflects  the  opinion  and  judgment  of  the  directors  of  only 
one  of  the  many  banks  of  London;  but  that  judgment,  let  us  remem" 
ber,  is  the  result  of  several  generations  of  knowledge  and  experience; 
and  is  a  striking  tribute  to  the  unique  position  occupied  bj-  the  Bank  of 
England  amongst  the  financial  institutions  of  the  world.  For  there  is 
really  nothing  like  it,  unless  perhaps  the  Bank  of  France  may  be  in- 
cluded in  the  same  category.  The  stability  of  that  great  Bank,  amidst 
the  constant  political  upheavals  of  the  country,  is  one  of  the  most  re- 
markable phenomena  of  modern  times. 

Reverting  to  the  classification  of  the  Barclay  Company's  investments, 
it  is  again  interesting  to  note  that  Corporation  storks  and  bonds  are 
placed  before  Indian  and  Colonial  Government  securities. 

The  corporation  bonds  referred  to  are  probably  those  of  British 
municipalities — cities  and  towns  chiefly — and  it  is  interesting  to  see 
how  high  a  place  they  hold. 

But  the  stocks  must  be  those  of  manufacturing  or  trading  companies, 
of  which  there  is  an  immense  variety  quoted  on  the  Eondon  Stock  Ex- 
change, and  of  all  possible  degrees  of  stability.  It  is  interesting  to 
note  that  there  are  stocks  of  this  description  which  are  considered  to  be 
at  least  equal,  as  a  banking  investment,  to  the  bonds  of  our  own  Govern- 
rrent. 

We,  however,  on  this  side  of  the  Atlantic  might  classify  the  securi- 
ties diff'erently.  For  even  with  regard  to  the  bonds  of  municipalities, 
it  is  a  question  if  the  element  of  municipal  trading  now  so  prominent 
■will  not  introduce  a  very  considerable  amount  of  uncertainty  as  to  the 
financial  position  of  such  corporations. 

As  to  stocks  of  trading  corporations,  called  on  this  side  of  the  Atlan- 
tic Industrials,  they  surely  cannot  be  compared  for  stability  with  the  ob- 
ligations of  the  great  colonies  and  dependencies  of  the  Empire.  Their 
debentures  are  worth  nearly  as  much  as  consols,  and  might  well  be 
placed  immediately  after  them. 

The  next  two  classifications  are  natural  enough.  British  railway 
bonds,  with  their  guaranteed  and  preference  stocks,  are  a  class  by  them- 
selves; and  their  stability  has  long  been  proved.  It  is  noticeable  that 
ordinary   stocks   are    not   included.     They    are    all    either   guaranteed    or 


190  BAXKIXG    AND    CO^IMEKCE. 

preference,  though   even   witli  these  the   question  may   arise,   guaranteed 
by  whom? 

The  final  item  of  nearly  $8,000,000  of  "other  securities"  is  one  in 
whicli  there  may  be  endless  scope  for  variations  in  value  according  to 
exigencies  of  the  times,  and  the  judgment  of  trained  experts  may  find 
constant  opportunities  for  exercise  in  considering  them. 

Investments  of  Canadian  Banks. 

It  M'ill  also  be  interesting  to  compare  this  classification  of  invest- 
ments with  that  of  the  Government  statements  of  Canadian  banks.  This 
classification  reflects  generally,  though  not  absolutely,  the  consensus  of 
both  the  Finance  Department  of  the  Government  and  the  Council  of  the 
Bankers'  Association.      It   is   divided  into  three  heads,  as   follows: 

1.  Dominion  and  Provincial  Government  Securities. 

2.  Canadian    Municipal    Securities,   and    British,    Foreign, 

or  Colonial  Securities  other  than  Canadian. 

3.  Railway  and  other  bonds,  debentures  and  stocks. 

This  classification  is  not  materially  different  from  that  of  the  Lon- 
don bank.  The  first  item  is  the  same,  with  the  exception  of  the  omission' 
of  bank  stock.  We  have  nothing  analagous  to  the  Bank  of  England  in 
Canada. 

The  second  and  third  items  correspond  to  the  second,  third  and  fourth 
ill  the  London  statement;  but  they  are  less  specific  and  more  compre- 
hensive. 

In  considering  the  Canadian  classification  it  will  be  evident  that 
other  considerations  than  relative  stability  of  value  have  governed  it. 
Dominion  and  Provincial  Government  securities  naturalW  come  first, 
but  there  is  a  very  wide  difference  between  the  value  of  the  two. 

The  second  item  includes  under  one  heading  classes  of  investments 
that  are  as  different  from  one  another  in  stability  and  value  as  can  be 
conceived.  In  the  same  column  are  included  all  sorts  of  Canadian  mu- 
nicipal securities  (town,  city  and  country  alike,  in  all  the  various  prov- 
inces), and  British  public  securities,  which  last  item,  of  course,  includes 
consols.  Then,  in  the  third,  there  is  no  distinction  made  between  railway 
bonds  and  stocks,  though  it  is  evident  that  for  purposes  of  bank. invest- 
ment these  two  are  widely  different  in  character.  Railway  stocks  are 
subject  to  sucli  fluctuations  and  manipulations  as  to  put  a  majority  of 
them  rather  into  the  category  of  speculative  holdings  than  solid  invest- 
ments that  should  be  clioscn  by  a  bank.  (It  will  be  noticed  that  in  the 
London  classification  all  the  stocks  arc  either  guaranteed  or  preference.) 

The  Canadian  bank  statement  miglit  be  amended  with  advantage  in 
many  particulars,  and  in  none  more  than  in  the  columns  showing  their 
investments.  Thus,  if  the  object  of  the  differentiation  of  the  assets  be 
to  show  how  much  of  a  bank's  funds  is  employed  in  discounting  and 
bow  much  in  investments,  one  column  for  each  would  be  sufficient.     This 


BANK    INVESTMENTS    AS    RESERVES.  191 

distinction  is  one  of  the  highest  importance;  for  the  total  amount  of  the 
discounts  and  advances  would  show  the  total  amount  of  service  the  bank 
is  rendering  to  the  commercial  community  of  the  country,  and  to  that 
extent  fulfilling  the  purposes  of  its  charter;  whilst  the  total  amount  of 
the  investments  would  show  what  provision  the  rules  of  the  bank  thought 
necessary  for  extraordinary  emergencies;  that  is,  to  secure  its  own  pro- 
tection. 

It  is  evident  that  there  should  be  a  reasonable  pro))ortion  betvveeen 
these  two.  For,  on  the  one  hand,  if  an  excessive  spirit  of  caution  were 
to  prevail,  the  wliole  of  the  funds  of  the  bank,  over  and  above  its  reserve 
of  cash  and  availables,  might  be  invested  in  Government  securities,  and 
so  save  the  authorities  of  the  bank  from  all  the  anxiety  arising  from 
dealing  with  the  commercial  community.  But  the  public,  that  granted 
the  charter  through  its  representatives,  would  certainly  complain  that  this 
style  of  management  was  not  fulfilling  the  object  of  the  bank's  exist- 
ence, and  might  require  its  charter  to  be  surrendered,  and  with  good 
reason. 

On  the  other  hand,  if  it  appeared  that  the  bank  had  no  investments 
at  all,  it  would  be  apparent  either  that  the  managers  were  making  inade- 
quate provision  for  emergencies,  or  that  their  ordinary  cash  resources 
were  maintained  at  an  imusually  high  figure.  In  that  case  the  stock- 
holders might  complain  that  the  bank  was  not  earning  sufficient  profit. 

General   Character  of   a   Bank's  Investments. 

As  to  the  character  of  the  investments  of  a  bank,  unless  the  whole  is 
to  consist  of  Government  securities,  it  is  evident  that  the  experienced 
judgment  of  a  manager  or  board  of  directors  would  find  ample  scope 
in  the  selection.  Even  in  municipal  securities  there  is  considerable  dif- 
ference in  stability  and  value;  although  it  may  be  stated,  to  the  honor 
of  Canadian  municipal  bodies,  that  none  of  them  in  the  older  provinces 
ever  made  default  in  the  payment  of  either  principal  or  interest.  But 
this  cannot  be  said  of  the  municipalities  of  the  Northwest.  Some  of 
them,  in  the  excitement  of  the  great  "boom"  of  an  early  daV,  entered 
into  engagements  which,  after  the  boom  collapsed,  they  were  entirely 
unable  to  fulfill.  The  result  was  a  compromise  with  their  creditors — a 
state  of  things  however  that  may  never  be  repeated. 

But  in  the  matter  of  railway  securities,  there  is  infinite  scope  for  the 
exercise  of  judgment,  and  still  more  in  those  of  enterprises  such  as 
shipping  and  manufacturing  companies.  It  is  to  be  supposed  that  no 
prudent  banker  will  choose  the  stoch  of  such  companies  as  a  subject  for 
investment.  The  fluctuations  are  far  too  serious  for  such  a  field  to  be 
ventured  upon,  amounting  as  they  do  (experience  shows  it)  to  as  much 
as  fifty  per  cent,  and  upwards.  Of  the  stocks  of  railway  and  other  in- 
dustrial corporations,  Canada  offers  only  a  slender  selection;  and  they 
would  scarcely  be  thought  of  for  investment  by  a  banker.  Prudence 
would  suggest  that  he  should  confine  himself  to  the  bonds. 


192  BANKING    AND    COMMERCE. 

The  bonds  of  railways  of  the  whole  continent  offer  a  very  large  field 
of  selection,  and  so  do  those  of  industrial  and  semi-public  undertakings. 
These  last  are  continually  increasing,  and  are  presented  by  their  pro- 
moters and  agents  in  every  variety  of  attraction.  This  is  especially  the 
case  with  the  more  speculative  varieties,  and  above  all  with  those  relat- 
ing to  gold  mining.  But  these  should  be  considered  as  out  of  the  realm 
of  a  banker. 

There  remain  to  be  considered  the  bonds  of  railways  and  of  well- 
established  undertakings   of  a  commercial  or  semi-commercial  character. 

With  respect  to  these,  a  banker  must  needs  exercise  a  far  more  criti- 
cal judgment  than  a  private  individual.  That  a  man  may  do  what  he 
likes  with  his  own  is  proverbial,  and  true  enough  within  limitations. 
But  no  man  may  do  what  he  likes  with  money  he  holds  in  trust.  In  in- 
vesting such  money  he  will  do  well  to  act  on  the  established  rule  that 
high  interest  denotes  poor  security.  Yet  a  banker  can  scarcely  avoid 
feeling  the  attraction  of  high  interest.  He  is  investing  for  the  sake  of 
the  interest;  that  is  certain.  And  when  a  choice  of  investments  is  before 
him,  as  it  continually  will  be,  the  higher  figure  will  inevitably  attract 
attention.  A  difference  of  one  per  cent,  in  the  return  on  a  considerable 
amount  of  bonds  will  make  a  perceptible  difference  in  his  profit  and  loss 
statement. 

There  are  always  two  impulses  in  such  cases — that  of  enterprise 
and  that  of  caution,  the  former  saying,  take  the  risk  and  get  the  higher 
return;  the  other,  be  careful,  for  in  seeking  higher  interest  you  may  lose 
some  of  the  principal.  It  need  not  be  said  that  the  latter  is  the  voice 
to   be   listened  to. 

But  mere  caution  will  not  be  sufficient  in  the  case.  A  banker,  in 
considering  investments,  will  take  means  to  acquire  information;  he  will 
make  comparisons;  he  will  look  into  antecedents  and  range  of  fluctua- 
tions; he  will,  perhaps  above  all,  consider  the  personnel  of  the  parties 
in  control.  If  his  information  as  to  the  last  is  unfavorable,  he  will  do 
well  to  take  the  benefit  of  the  doubt.  For  bonds,  as  well  as  stocks, 
though  no-t  to  the  same  extent,  may  be  subject  to  the  operations  of  the 
giants  of  finance,  whereby  innocent  "lambs"  are  fleeced.  Above  all. 
ivith  regard  to  bonds,  he  will  choose  out  those  that  are  first  preference. 

A  banker  will  certainly  observe  another  rule  of  investment,  viz.,  to 
divide  his  risks.  And  in  so  doing  he  will  divide  not  only  amongst  cor- 
porations, but  amongst  classes.  So  much  of  ordinary  railways,  so  much 
of  street  railways,  so  much  of  light  and  power  companies,  so  much  of 
navigation  companies,  so  much  of  iron,  cotton,  wool,  flour,  and  so  on; 
this  will  be  the  rule,  as  well  as  so  much  under  this  control,  and  so  much 
under  that.  He  will  thus  ensure  a  general  average  of  safety,  for  it  is 
scarcely  possible  that  the  same  cause,  at  the  same  time,  can  affect  them 
all. 

A  banker  will  revise  his  investments  from  time  to  time  as  he  does  his 
discounts,  and  pass  judgment  upon  them  in  detail.     In  so  doing,  he  can 


RAXK    INVEST.MENTS    AS    RESERVES.  193 

scarcely  fail  at  times  to  discern  symptoms  of  weakness  in  certain  direc- 
tions leading  to  desirableness  of  change.  For  it  is  in  this,  as  it  is  in  all 
other  spheres  of  action,  that  constant  vigilance  is  the  price  of  safety. 

But  one  settled  principle  should  never  be  departed  from,  viz.,  that 
stocks  sliould  he  lent  upon,  but  not  owned.  When  a  bank  buys  stock  it 
makes  itself  a  sort  of  partner  in  the  enterprise — certainly  an  improper 
position;  while  in  buying  bonds  it  is  occupying  its  proper  sphere  as  a 
lender  of  money. 

It  may  be  thought  that  the  foregoing  observations  have  no  bearing 
on  the  conduct  of  a  commercial  or  manufacturing  business.  But  in  truth 
every  merchant  and  manufacturer  will  find  it  to  his  interest  to  accumulate 
what  corresponds  to  the  rest  or  reserve  fund  of  a  bank.  This  indeed 
some  of  them  do.  But  this  surplus  over  ordinary  capital  is  often  invested 
in  the  business,  and  not  available  when  wanted  for  emergencies.  A  re- 
serve fund  that  is  represented  by  buildings  and  machinery  is  no  reserve 
fund  at  all.«i 

61  One  of  the  most  prosperous  of  the  many  prosperous  manufacturing  concerns 
of  Canada  was  managed,  financially,  on  the  principle,  first  of  accumulating  suffi- 
cient cash  reserves  to  enable  them  to  hold  their  bills  receivable  without  dis- 
counting, and.  after  that,  of  Investing  surplus  profits  in  Government  securities 
and   other   negotiable  bonds. 

The  business  of  this  concern  called  at  times  for  very  heavy  outlays  that  could 
not  be  foreseen,  a  state  of  things  that  might  have  been  embarrassing  but  for  their 
possession  of  this  large  reserve  of  bonds.  When  the  emergency  arose  they  would 
take  their  bonds  to  a  bank  and  obtain  advances  on  them  at  a  much  lower  rate 
than  that  at  which  they  could  discount  bills  on  their  own  credit,  or  on  warehouse 
receipt.  To  this  it  may  be  replied  that  a  commercial  or  manufacturing  concern  in 
good  credit  can  always  obtain  advances  from  its  bankers;  and  that  it  is  rather  a 
diversion  of  funds  from  profitable  uses  to  invest  in  securities  that  yield  a  low 
rate  of  interest.  But  it  is  not  true  that  a  respectable  concern  can  obtain  advances 
from  its  bankers  at  all  times.  Bankers  are  themselves,  at  times,  short  of  money, 
and  are  constrained  to  refuse  even  their  soundest  customers.  The  advantage,  then, 
to  a  commercial  house  of  having  a  reserve  of  negotiable  oonds  is  that  if  an  emer- 
gency arises,  they  can  apply  to  any  bank  doing  business  In  their  district,  or  even 
beyond  it;  or,  in  the  last  resort,  they  can  put  their  bonds  on  the  market.  But  It 
Is  evident  that  a  firm  in  this  position  can  at  times  take  advantage  of  favorable 
changes  in  the  price  of  commodities,  and  buy  for  cash  at  a  time  when  others 
are  precluded  from  doing  it.  They  can  thus  realize  an  exceptional  profit,  besides 
being  in  so  strong  a  position  that  they  can  present  a  square  front  to  all  the 
winds  that  blow,   no  matter  how  stormy. 


CHAPTER   XXV. 
SECURITY    AND    SECURITIES   IN    GENERAL. 

Security  and  Securities  Theoretically  Considered,  with  Practical 
Applications — Of  Security  in  General:  Its  Limitations — Per- 
sonal Security — Endorsements — Guarantees — Security  Taken 
on  Goods. 

SOME  of  the  observations  in  this  and  the  preceding  chapters  will  have 
been  found  in  other  portions  of  this  work  where  modes  of  doing 
business  are  referred  to.      (See  chapters  on    Loans.)       They    are 
repeated  here  because  of  their  intrinsic  importance  and  because  the  ques- 
tion with  which  this  chapter  is  concerned  is  specifically  that  of  security 
and  the  various  considerations  connected  with  it. 

In  one  of  the  striking  scenes  of  "Hamlet,"  the  great  dramatist  makes 
the  Prince  of  Denmark  say  to  Horatio  while  they  are  standing  in  the 
churchyard  talking  together:  "Is  not  parchment  made  of  sheep  skins .^" 
To  which  his  friend  replies:  "Ay,  and  of  calf  skins,  too,  my  lord." 
Hamlet  rejoins:  "They  are  sheep  and  calves  too  that  seek  out  assurance 
in  that."  A  biting  sarcasm,  and  one  that  has  proved  only  too  true  in  the 
experience  of  many  an  unfortunate  money  lender,  who  relied  for  what 
Shakespeare  calls  "assurance,"  but  what  we  generally  name  security, 
upon  the  mere  possession  of  parchment  deeds;  forgetting  that  the  real 
assurance  is  not  in  the  parchment,  but  in  the  property,  whatever  it  may 
be,  that  the  parchment  purports  to  hold.  "Purports"  is  a  very  impor- 
tant word  in  this  connection,  for  deeds  do  not  always  fulfil  the  purpose 
which  the  holder  supposes  they  do.  A  deed  may  be  improperly  drawn; 
it  may  be  signed  by  a  party  who  has  no  right  in  law  to  convey.  If  he 
signs  in  an  official  capacity,  let  us  say  as  curator,  trustee  or  what  not, 
the  instrument  creating  his  authority  may  be  a  faulty  one.®-  The  con- 
veyance of  itself  may  be  one  that  is  against  common  or  statute  law; 
as,  for  example,  certain  conveyances  are  prohibited  by  the  Banking  Act; 
or  the  whole  document  may  be  a  forgery,  signers  and  witnesses  alike. 
But  even  if  the  parchment  itself  is  strictly  regular  in  terms  and  the  con- 
veyance authorized  by  law,  it  may  still  fall  short  of  being  what  it  pur- 
ports to  be ;  i.  e.,  security.  For,  if  it  is  a  title  to  land,  the  land  may  have 
fallen  out  of  cultivation,  with  buildings  dilapidated,  fences  thrown  do>vn 
or  destroyed,  and  a  plentiful  crop  of  weeds  and  new  underbrush,  which 

62  An  instance  of  this  is  afforded  by  something  that  took  place  in  one  of  the 
midland  counties  of  England,  where  a  bank  took  over  as  collateral  security  the 
deeds  of  a  property  valued  at  £80,000.  Trouble  arose.  It  was  necessary  to  pro- 
ceed upon  the  deeds;  when,  to  the  disgust  of  the  bank,  they  were  pronounced  by 
a  high-class  conveyancer  utterly  worthless  to  convey  a  negotiable  title.  Yet 
they   had   been   examined   by  the   bank's  own    solicitor   and   pronounced   perfect. 


SECURITY   AND   SECURITIES   IN    GENERAL.  195 

will  take  years  to  brinj;  back  into  a  proper  condition.  Nay,  the  land 
represented  by  the  parchment  may  be  in  the  condition  kno\vn  as  drowned 
land,  being  continuously  overflowed  by  water  and  useless  for  any  pur- 
pose whatever.  All  these  cases  have  been  actually  known  in  Canadian 
experience. 

The  instrument  may  not  purport  to  convey  land  at  all,  but  chattels, 
personal  effects  or  merchandise,  in  which  case  another  element  of  uncer- 
tainty enters  in.  For  whereas  land  cannot  be  moved,  and  therefore  is 
called  real  estate,  chattels  and  merchandise  can.  So  then,  whilst  the 
parchment  or  other  document  of  security  lies  safe  in  the  money-lender's 
strong  box,  the  thing  which  is  supposed  to  make  him  secure  may  have 
been  made  away  with.  True  it  is,  that  the  law  provides  a  certain  safe- 
guard in  the  shape  of  stringent  penalties  against  such  removal,  making 
it  almost  equivalent  to  theft.  But,  while  it  is  comparatively  easy  to  se- 
cure conviction  and  punishment  for  actual  theft,  it  has  been  proved  to  be 
difficult  to  obtain  conviction  in  the  case  of  chattels  that  have  been  removed 
improperly.  Hence  this  is  a  real  danger,  which  can  never  be  lost  sight 
of  by  any  man  that  holds  chattels  as  security. 

Benevolent  Loans. 

The  general  question  of  security  is  one  that  has  so  vital  a  connection 
with  the  banker's  business  that  it  is  desirable  to  lay  down  with  perfect 
clearness  all  that  appertains  to  it.  It  is  a  well  understood  and  univers- 
al principle  that  when  a  man  allows  another  to  have  the  use  of  his  money 
he  shall  give  some  form  of  assurance  that  it  will  be  returned  at  the  time 
agreed  upon.  The  only  exception  is  in  the  case  of  private  loans  made 
from  motives  of  benevolence — a  very  important  distinction — and  one  that 
throws  some  light  on  passages  in  ancient  books  on  the  subject,  the  Script- 
ures for  example.  Benevolent  loans  are  quite  commonly  unsecured; 
moreover,  they  are  generally  without  interest,  a  fact  that  at  once  removes 
them  from  the  category  of  banking  loans.  When  a  man  lends  a  sum  of 
money  to  tide  a  friend  over  a  difficulty,  or  to  help  a  poor  widow  to  pre- 
vent her  goods  from  being  seized,  the  character  and  the  motive  of  the 
transaction  are  wholly  different  from  loans  undertaken  by  bankers.  Even 
if  the  principal  is  not  repaid  when  promised,  the  lender  is  seldom  vexed. 
He  did  not  lend  the  money  as  a  matter  of  business,  and  will  find  his  sat- 
isfaction not  in  the  receipt  of  interest,  but  in  doing  good."^ 

Personal  Guarantee. 

By  far  the  most  common  of  all  forms  of  banking  security  is  that  of 
personal  guarantee.  That  there  should  be  two  names,  at  least,  to  every 
bill,  is  a  banking  axiom,  and,  in  the  case  of  trade  bills,  it  is  a  matter  of 

63  A  careful  perusal  of  those  passages  of  the  Old  Testament  in  which  usury 
Is  forbidden  will  show  that  many  of  them  refer  to  loans  of  this  class,  viz.,  to 
money  lent  to  needy  brethren.  In  other  cases  the  prohibition  is  against  exces- 
sive and  burdensome  interest.  But  the  teaching  of  Jesus  Christ  clearly  recog- 
nizes the  reasonableness  of  interest  being  required  when  the  transaction  is  purely 
a  matter  of  business.    (See  Mathew  XXV.    ?7.) 


106  BANKING    AND    COMMERCE. 

course;  for  such  bills  arise  from  a  transaction  between  two  parties,  both 
of  whose  names  are  on  the  document.  Hence  every  trade  bill  would  be 
classified  as  a  secured  transaction.'^' 

But  a  banker  will  not,  as  a  rule,  deal  with  trade  bills  long  before 
finding  out  tliat  security,  so  called,  does  not  necessarily  make  secure.  In 
estimating  the  value  of  trade  bills  it  is  customary  to  use  the  phrase,  are 
the  makers  or  promisers  good  for  the  amount — a  phrase  which  primarily 
means,  have  they  money  or  available  resources  enough  to  pay  the  bill. 
This  is  the  commercial  sense  of  the  word  good;  but  the  primary  meaning 
of  the  word,  as  every  one  knows,  is  a  moral  one.  It  has  to  do  with  char- 
acter, not  money.  The  question  therefore  is  one  of  morality  also,  and 
involves  the  consideration  not  only  whether  the  maker  is  able,  but 
wliether  he  is  willing.  In  looking  at  a  certain  name  a  banker  therefore 
considers  not  alone  the  resources  of  tlie  party,  but  his  cliaractcr  also,  and 
from  this  forms  his  conclusion,  whether  payment  of  that  particular  bill 
may  be  relied  upon.  But  this  is  not  all.  A  trade  bill  is  never  brought 
to  the  banker  by  the  maker;  and  in  this  there  is  an  essential  difference 
between  a  trade  bill  and  an  endorsed  loan  bill.  In  the  latter  case  the 
maker  invariably  brings  it.  But  the  trade  bill  is  brought  by  the  endorser; 
the  man  who  sold  the  goods. 

These  points  have  been  brought  to  the  reader's  attention  in  other 
chapters  and  need  not  be  enlarged  upon  here,  further  than  to  say  that 
the  banker  in  discounting  a  trade  bill  looks,  primarily,  for  his  security  to 
his  own  customer,  the  man  who  brings  it  to  him.  And  in  so  doing  he  has 
an  assurance,  with  regard  to  the  other  name,  that  of  the  maker  or  ac- 
ceptor of  the  bill,  for  before  he  got  the  bill  at  all  the  seller  of  the  goods 
must  have  exercised  his  judgment  and  concluded  that  the  buyer  was  able 
to  pay  for  them.  The  banker,  therefore,  with  regard  to  such  bills,  exer- 
cises a  double  mental  operation  and  considers,  first,  whether  the  maker 
can  and  will  pay  the  bill,  and  also  whether  his  customer  can  and 
will  in  case  the  maker  does  not.  So  important  has  this  last  con- 
sideration become,  that  in  nearly  all  well  governed  banks  the  rule  pre- 
vails to  continue  discoimting  for  no  man  who  has  not  proved  himself  able 
and  willing  to  take  up  such  bills  at  once,  in  case  they  are  dishonored. 
A  customer  who  fails  to  do  this  is  speedily  made  aware  that  his  account  is 
undesirable. 

But  the  question  of  security  by  endorsement  arises  most  frequently 

gT  There  is  indeed  a  mode  of  dealing  with  trade  bills,  in  large  financial  cen- 
tres, known  as  "buying  and  discounting  bills  without  recourse,"  that  is,  where 
the  banker  relinquishes  the  right  to  call  upon  the  seller  of  the  bill,  and  under- 
takes to  rely,  solely,  on  the  maker.  The  seller  of  such  a  bill.  In  endorsing,  adds 
the  words  "without  recourse,"  meaning  without  recourse  to  him.  The  bill  then 
becomes  a  one  name  bill,  and  naturally  a  higher  price  is  demanded  for  cashing 
It.  Some  merchants  systematically  conduct  their  discounting  business  on  this 
principle,  and  are  willing  to  pay  much  heavier  charges  for  discount  in  consider- 
ation of  being  relieved  of  responsibility  for  their  customers'  bills.  There  are 
bill-broking  firms  and  companies  who  cultivate  this  class  of  business,  making  a 
specialty  of  it,  and  taking  means  to  acquire  the  wide  range  of  information  neces- 
sary to  do  it  safely. 


SECUIUTY   AND   SECURITIP:S   IN    GENERAL.  197 

with  regard  to  just  sucli  advances  of  money  by  a  banker  to  a  customer. 

A  man  in  business,  needing  supplies  of  money  for  his  operations,  will 
frequently  prevail  upon  some  neighbor,  relative  or  friend  to  become  his 
surety;  or,  to  speak  in  common  phrase,  to  endorse  his  paper.  Such  an 
endorsement  is  of  an  entirely  different  character  from  that  of  the  owner 
of  a  note  or  bill,  who  passes  his  title  on  to  a  succeeding  holder  for  value 
bv  endorsing  it.  The  endorsement  now  referred  to  is  of  the  nature  of  a 
surety  or  guarantee. 

With  regard  to  the  value  to  be  attached  to  such  endorsements  much 
confusion  of  thought  exists.  A  banker  who  lends  ten  thousand  dollars 
on  the  endorsement  of  another  man,  reputed  to  be  worth  twenty  thou- 
sand, might  seem  to  be  undertaking  a  very  safe  operation;  but  experience 
teaches  that  he  might  be  leaning  upon  a  broken  reed.  The  endorser 
might  be  surety  for  other  persons  also,  and  the  aggregate  amount  of 
these  obligations  might  be  far  beyond  his  means  of  meeting  them.  Such 
cases  have  arisen  and  have  opened  the  eyes,  more  than  once,  of  confiding 
bankers,  and  shown  that  before  lending  money  on  the  strength  of  a  cer- 
tain endorser  inquiries  should  have  been  made  whether  he  was  not  in- 
volved in  the  success  or  failure  of  half  a  dozen  commercial  enterprises 
over  which  he  could  exercise  no  effective  control.  But,  besides  this,  there 
is  another  very  important  consideration.  An  endorser  becoming  surety 
for  ten  thousand  dollars,  might  be  utterly  unable  to  pay  as  much,  even 
if  he  had  a  real  surplus  of  twenty  thousand,  without  winding  up  his  own 
business.  This  surplus  might  consist  in  land,  buildings  and  machinery, 
on  which  the  very  existence  of  his  own  business  depended.  And  it  might 
be,  and  probably  would  be.  impossible  for  him  to  diminish  his  own  capital 
by  the  sum  necessary  to  pay  the  amount  he  endorsed,  without  ruining  his 
own  credit.  In  this  instance  the  banker  would  almost  certainly  be  con- 
fronted, in  case  of  need,  wuth  a  proposal  from  the  endorser  to  release 
him,  on  payment  of  only  a  portion  of  what  he  had  endorsed.  If  he  re- 
fused, and  demanded  what  was  due,  he  might  find  himself  the  plaintiff 
in  a  vexatious  lawsuit,  and  only  obtain  judgment  after  long  delay,  by 
which  time  the  affairs  of  the  endorser  might  be  put  into  such  a  shape  that 
to  collect  the  debt  would  be  impossible. 

The  banker,  in  considering  an  endorsement,  will  do  well  to  remem- 
ber that  what  he  wants  from  the  endorser  is  assurance  of  repayment  at 
the  time  promised,— time  being  of  the  essence  of  the  value  of  the  secu- 
rity. He  must  therefore  consider  whether  the  endorser  is  in  such  a  posi- 
tion that  he  could  pay  the  amount  when  called  upon  without  embarrass- 
ment. Many  a  man  is  in  a  position  at  all  times  to  meet  his  own 
engagements  who  Avould  be  seriously  embarrassed  to  pay  the  debts  of 
another  person.  It  is  sometimes  said  by  a  borrower,  to  a  proposed  en- 
dorser, that  it  is  a  mere  matter  of  form;  that  he,  the  borrower,  will  be 
sure  to  pay  the  note  at  maturity.  And  not  a  few  endorsers  have  been 
incautious  enough  to  believe  it,  finding  out  to  their  cost  that  to  guarantee 
another  man's  debt  is  no  mere  matter  of  form,  but  a  very  solid  reality. 


IPS  BANKIN'G    AND    COMMERCE. 

Various  Classes  of  Endorsers. 

There  arc  various  classes  of  endorsers,  as  there  are  of  borrowers. 
There  are  endorsers  wlio  treat  the  matter  so  lightly  that  they  will  en- 
dorse for  any  amount,  and  never  think  of  keeping  a  record  of  their  re- 
sponsibilities. These  are  a  class  for  a  banker  to  avoid.  On  the  other 
hand,  there  are  endorsers  who  are  keenly  alive  to  the  responsibility  they 
undertake,  who  consider  carefully,  and  insist  on  knowing  accurately  the 
position  of  the  borrower  before  undertaking  that  he  shall  pay  a  certain 
amount  of  money  on  a  certain  day.  A  prudent  endorser  will  take  means 
to  have  an  efficient  oversight  of  the  borrower's  business  so  long  as  the 
obligation  endures;  considering,  very  properly,  that  his  guarantee  gives 
him  a  right  to  this  position.  An  endorser  of  this  kind  is  esteemed,  and 
very  properly  so,  a  more  valuable  one  than  another  of  much  larger  means 
who  would  neglect  such  precaiitions,  especially  if  he  has  had  more  expe- 
rience in  business  than  the  borrower  and  is  able  to  give  him  valuable 
hints  as  to  his  business.  Thus  a  father's  endorsement  for  a  son  just 
commencing  business  is  of  a  particularly  valuable  kind,  or  that  of  the 
senior  partner  of  a  firm,  who,  after  retiring,  consents  to  guarantee  a  cer- 
tain amount  of  their  liabilities. 

There  is  another  class  of  endorsers  that  used  to  be  much  more  com- 
mon than  at  present;  namely,  the  professional  endorser,  who  is  known 
in  the  community  as  such,  and  endorses  or  guarantees  for  a  commission. 
Such  men,  generally,  have  some  capital  at  command,  but  the  value  of 
their  endorsement  largely  depends  on  the  prudence  with  which  they  carry 
on  their  business.  A  prudent  endorser  of  this  class  will  always  scruti- 
nize carefully  the  position  and  character  of  the  borrower.  He  will  make 
accurate  record  of  his  guarantees,  as  if  they  were  his  own  promissory 
notes.  And  he  will  take  care  never  to  allow  his  name  to  remain  in  de- 
fault. The  endorsement  of  such  a  man,  so  long  as  he  is  commercially 
"good,"  will  come  to  have  a  peculiar  value  in  a  banker's  eyes,  as  being 
almost  equivalent  to  a  certificate  that  the  borrower  is  both  able  and  will- 
ing to  pay  his  debts.  This  class  of  man,  however,  is  rapidly  disap- 
pearing. 

There  is  another  class  of  endorsements  to  be  considered;  namely,  that 
of  more  persons  than  one  on  the  same  note.  A  loan  will  sometimes  be 
proposed  to  a  banker,  generally  in  connection  with  some  public  enter- 
prise, in  which  the  notes  are  to  be  endorsed  by  four  or  five  individuals. 
This  class  of  endorsements,  however,  often  proves  very  unsatisfactory, 
for  although  each  of  the  endorsers  is  responsible  for  the  whole  amount 
of  the  note,  it  rarely  happens  that  any  one  of  them  is  willing  to  pay  the 
whole  amount.  He  will  come  to  a  banker  and  offer  to  pay  his  share  and 
request  a  discharge,  which,  of  course,  the  banker  will  not  grant.  Con- 
sultations then  follow  between  the  parties  as  to  how  the  obligation  is  to 
be  met,  in  M'hich  one  will  offer  to  do  this,  and  another  that,  but  seldom 
coming  to   an   agreement   satisfactory   to   the  banker.     Not   infrequently 


SECURITY   AND   SECUKITIKS   IN    GENERAL.  199 

they  quarrel  among  themselves,  each  one  of  them  declaring  that  he  will 
fight  to  the  last  in  resisting  payment.  The  banker  then  finds  himself 
involved  in  half  a  dozen  lawsuits,  and  it  will  go  hard  if  some  clever  law- 
yer, employed  by  one  of  the  parties,  does  not  find  a  loophole  for  evasion, 
or  delay,  owing  to  some  peculiarities  in  the  case,  possibly  suggested  by 
false  swearing  or  confused  testimony.  We  know  how  a  clever  counsel 
can  confuse  a  witness  so  much  as  to  get  him  to  admit  almost  anything, 
and  a  banker  in  the  witness-box  is  just  as  liable  as  other  people  to  be 
wheedled  or  bullied  into  admissions  of  a  damaging  nature,  such  as  may 
be  almost  fatal  to  his  case. 

There  is  another  consideration  with  regard  to  these  multiple  endorse- 
ments ;  namely,  that  by  law  each  endorser  on  a  bill  has  recourse  upon  the 
preceding  one,  this  being  founded  upon  the  practice  of  jjassing  notes 
from  one  man  of  business  to  another  for  a  valuable  consideration,  as  used 
to  be  common  in  the  business  world.  In  this  case  it  is  perfectly  equitable 
for  the  last  endorser  to  call  upon  the  preceding  one  to  pay  him,  and  so 
on,  until  the  maker  or  acceptor  is  reached.  This  law  prevails  even  in 
such  cases  as  have  been  referred  to,  although  the  circumstances  are  en- 
tirely different.  There  is  no  method  under  our  law  of  bills  of  exchange 
by  which  a  number  of  men  can  endorse  a  note,  one  after  another,  so  as  to 
be  jointly  and  severally  liable,  and  avoid  recourse  upon  previous  names. 
It  is  therefore  better  that  the  persons  proposing  to  become  security 
should  become  joint  and  several  promisors,  or  joint  and  several  guaran- 
tors on  a  separate  instrument. 

Differences  Between  Endorsement  and  Guarantee. 

This  leads  to  the  question  of  the  difference  between  an  endorsement 
and  a  document  of  guarantee ;  respecting  which  it  is  well  to  note  some 
points  for  consideration. 

The  first  point  is  that  endorsements  require  to  be  on  each  separate 
note,  and  that  when  there  are  several  endorsers  for  the  same  debtor  on 
separate  notes,  and  difficulties  arise  in  the  circumstances  of  the  maker, 
each  endorser  can  claim  the  right  out  of  any  security  realized  to  have' 
his  notes  paid  in  the  order  in  which  they  become  due.  This  operates,  in 
some  cases,  very  much  to  the  creditor's  disadvantage.  Moreover,  if  the 
time  for  a  loan  is  long,  as  it  requires  to  be  in  some  lines  of  business, 
notes  require  to  be  renewed,  failing  which,  they  lie  under  protest  in  the 
banker's  hands.  Now,  the  endorser  may  not  be  at  hand;  he  may  be,  in 
these  times  of  travel,  at  a  considerable  distance;  or  he  may,  in  some 
cases,  refuse  to  endorse  a  renewal,  and  insist  on  the  banker  forcing  pay- 
ment. If  the  banker  refuses,  as  being  contrary  to  agreement,  the  en- 
dorser may  pay  the  note  himself,  and  sue  the  maker,  to  the  great  damage 
of  his  credit,  and  with  a  danger  of  bringing  about  a  stoppage  of  his  busi- 
ness. 

A    guarantee,    however,    obviates    all    these    difficulties.     But    such    a 


200  BANKING    AND    COMMERCE. 

document  requires  to  he  drawn  with  exceeding  care — so  as  to  avoid  bring- 
ing the  banker  himself  under  obligations  upon  which  a  defense  might  be 
hung  in  case  of  suit.  There  is  scarcely  any  instrument  capable  of  giving 
rise  to  so  many  conflicting  points  as  a  loosely  drawn  guarantee.  For 
this  reason  the  banker  will  bring  to  his  aid  the  best  legal  talent  available 
to  prepare  a  proper  form  of  instrument  applicable  to  general  uses.  This 
guarantee  should  provide  for  renewals,  changes  of  security,  additional 
advances,  partial  payments  and  other  contingencies,  and  in  most  cases 
should  bind  the  guarantor  to  pay  a  specific  sum  whenever  called  upon. 

But  a  guarantee  may  be  taken  for  a  running  account,  and  made  to 
cover  the  balance  due  on  such  an  account,  whenever  it  may  be  struck.  In 
some  cases,  indeed,  where  an  account  is  a  complicated  one,  and  consists 
partly  of  trade  bills  and  partly  of  securities  of  various  classes,  a  guaran- 
tee may  be  taken  for  the  final  balance  remaining  after  other  securities 
are  exhausted.  This  word  exhausted,  however,  in  a  legal  document,  re- 
quires to  be  very  carefully  defined.  But  one  thing  a  banker  needs  to  be 
particularly  careful  about,  viz.,  not  to  introduce  special  conditions,  of 
his  own  motion,  into  a  form  of  guarantee  which  has  been  prepared  by 
his  solicitor.  He  will  alwaj's  find  it  prudent  to  let  his  solicitor  insert  the 
special  conditions  also. 

Of  the  two  forms  of  personal  security,  therefore,  an  endorsement  is 
the  most  simple  and  the  least  open  to  misconstruction,  and  affords  the 
least  opening  for  a  vexatious  defense  in  case  of  a  suit.  And  when  the 
note  guaranteed  is  a  single  transaction,  and  not  a  part  of  a  general  ar- 
rangement for  advances,  it  is  the  most  advisable  form  of  personal  secu- 
rity that  can  be  taken. 

But  there  is  this  to  be  said,  that  a  guarantee  is  alwaj'S  witnessed,  and 
is  generally  signed  in  the  office  of  the  bank,  or  the  bank's  attorney;  while 
it  not  infrequenth^  happens  that  the  maker  of  an  endorsed  note  brings  it 
to  the  bank  for  discount,  and  expects  it  to  be  passed  without  further  cere- 
mony. But  a  prudent  banker  will  invariably  require  the  endorser  to  be 
present  when  he  affixes  his  signature,  especially  when  the  amount  is  large. 
For  an  endorsement  may  be  forged;  or,  even  if  the  original  signature  is 
genuine,  the  renewal  may  be  forged.  An  endorsement  of  a  loan  bill,  in 
fact,  as  it  is  a  document  of  guarantee,  should  be  treated  with  as  much 
care  and  ceremon}^  as  if  it  were  a  deed  to  be  signed,  sealed,  and  delivered 
by  the  party  to  it. 

Loans  Secured  by  Merchandise. 

It  is  a  fundamental  axiom  in  banking  that  all  discount  loans  for  com- 
mercial firms  should  rest  on,  or  be  represented  by,  salable  goods,  on 
which  no  other  person  has  a  claim.  Exceptions  there  are,  as  have  been 
noted,  but  the  exceptions  are  few.  It  is  here  that  banking  differs  from 
mere  money-lending;  its  loans  should  be  founded,  not  simply  on  valuable 
property  or  even  valuable  goods,  but  on  goods  that  are  salable,  that  have 


SECUETTY  AND   SECURITIES   IN   GENERAL.  201 

a  market  value,  that  are  dealt  in  between  man  and  man,  and  between 
country  and  country.  In  other  words,  banking  is  the  hanrmaid  of 
coMMEncE.  But  although  these  things  are  so,  it  is  not  all  banking  dis- 
counts or  loans  that  constitute  a  claim  on  any  particular  goods.  It  can- 
not be  said,  for  example,  that  a  trade  bill  is  represented  by  such  and  such 
lots  of  dry  goods,  groceries  or  hardware  in  the  store  of  the  person  who 
has  made  the  bill.  They  are  not  earmarked  and  set  aside  for  that  pur- 
pose. There  are,  however,  banking  loans  that  do  rest  on  goods  that  are 
specifically  designated  and  set  aside  for  the  purpose. 

The  security  for  this  class  of  loans  has  now  to  be  considered. 
The  simplest  and  most  natural  form  of  lending  money  on  the  secu- 
rity of  goods  is  that  of  the  pawnbroker,  so  called — a  very  misleading 
name — for  his  real  business  is  to  lend  money  on  goods  that  are  left  in 
his  possession.  It  is  a  most  simple  business,  requiring  scarcely  any 
C'ipacity  to  carry  it  on,  except  a  fair  judgment  as  to  what  goods  will  sell 
for.  The  pawnbroker  does  not  rely  on  any  legal  documents  to  secure 
him  and  he  cares  nothing  about  the  standing  of  his  customer.  He  has 
the  goods  themselves,  and  it  is  his  own  lookout  if  he  does  not  take  proper 
care  of  them.  The  pawnbroker's  loans  are,  however,  not  commercial. 
No  man,  in  a  centre  like  Chicago  or  Liverpool,  would  deposit  a  thousand 
barrels  of  flour  with  a  pawnbroker  and  get  an  advance  on  ihem.  Such 
loans  are  part  of  the  operations  of  commerce,  and  would  be  applied  for 
to  a  banker. 

Now,  as  a  pawnbroker  keeps  a  shop  or  a  warehouse  in  which  to  store 
the  goods  he  has  lent  money  upon,  it  would  naturally  be  supposed  to  ap- 
pertain to  a  banker's  business  to  have  a  warehouse,  wharf  or  yard,  with 
conveniences  for  the  storage  of  various  classes  of  goods  owned  by  his 
customers.  This  would  strike  anyone  as  the  most  reasonable,  natural, 
not  to  say  safe,  mode  of  transacting  business.  "Bring  me  your  goods," 
the  banker  might  say,  "and  I  will  lend  you  money  upon  them."  In  some 
parts  of  the  world  this  is  actually  the  mode  on  which  banking  loans  on 
goods  are  made.  The  bank  owns  as  a  part  of  its  machinery  (so  to  speak) 
a  commodious  warehouse,  yard  or  wharf,  in  which  it  requires  all  goods 
to  be  deposited  on  which  advances  are  made.  These  are,  of  course,  in 
charge  of  its  own  officers,  and  the  bank  attends  to  insurance  at  the  charge 
of  the  borrower;  charging  him  also,  directly  or  indirectly,  with  the 
storage.'""'^ 

That  this  tends  in  a  remarkable  degree  to  the  safety  of  such  loans 
goes  without  saying.  The  only  danger  to  the  banker  in  that  case  is  that 
he  may  overestimate  the  value  of  the  goods,  or  forget  to  take  into  account 
the  chance  of  decline. 

This  mode   of   procedure,   however   rational   it  may   seem,   has   never 
been  adopted  by  bankers  generally.     The  bankers  of  Great  Britain,  gen- 
es The  Imperial  Bank  of  Germany  conducts  its  business  on   this  principle,  and 
Is  the  owner  of  many  warehouses  in  different  parts  of  the  Empire,   in  which  are 
Btored  all  eroods  that  are  advanced  upor. 


202  BANKIXG    AND    COMMERCE. 

en^lly  speaking,  know  nothing  ofit:^^"  ncitlier  do  those  of  the  Ignited 
States  or  Canada.  They  keep  no  storehouses  or  yards  in  which  to  place 
goods  they  have  loaned  upon ;  though  doubtless  many  of  them  have  wished 
they  had  done  so  when  they  have  been  deceived  by  documents  purporting 
to  represent  goods.  All  the  loans  in  their  books  stated  to  be  on  goods 
rest  in  fact  upon  nothing  but  pieces  of  paper;  or  rather  let  us  say,  on 
what  is  written  on  pieces  of  paper.  Just  as  an  American  Treasury  cer- 
tificate for  five  thousand  dollars  represents  that  amount  of  actual  coin 
in  its  vaults,  so  are  these  pieces  of  paper  presumed  to  represent  so  many 
tons  of  iron,  bags  of  wool,  barrels  of  flour,  or  bushels  of  wheat.  And, 
to  say  the  truth,  there  are  such  documents  which  carry  almost  as  much 
assurance  with  regard  to  goods  as  the  gold  certificates  of  the  American 
Treasury  do  with  regard  to  money.  "When  the  officers  of  a  well-known 
warehousing  or  dock  company  issue  a  certificate  that  they  have  received 
a  thousand  barrels  of  flour  from  John  Smith  or  a  thousand  bales  of  cot- 
ton from  MacGregor  &  Co.,  and  that  they  will  deliver  the  same  on  pro- 
duction of  the  certificate  duly  endorsed,  a  banker  will  feel  almost  as  much 
assurance  in  advancing  on  such  a  document  as  if  he  had  the  goods  in  his 
own  possession."^ 

This  is  more  especially  the  case  if  such  documents  are  registered,  as 
they  are  in  Chicago  and  other  grain  warehousing  centres  of  the  United 
States.  The  truth  is  that  the  value  of  the  document  is  in  the  responsi- 
bility of  the  party  issuing  it.  This  is  a  principle  that  is  often  forgotten, 
and  it  is  here  repeated,  that  it  may  be  better  remembered.  The  value  of 
the  document  is  in  the  responsibility  of  the  party  issuing  it.  There  are 
various  grades  of  such  documents  as  there  are  various  grades  of  bills  and 
promissory  notes,  the  question  always  being,  in  the  first  place,  will  the 
issuer  of  such  a  receipt  sign  the  document  unless  he  has  the  goods  in 

66  It  has.  however,  sometimes  happened  that  in  conservative  Great  Britain,  ex- 
ceptional measures  are  taken  with  regard  to  property  advanced  upon.  A  bank 
In  the  "Black  Country"  was  at  one  time  in  the  habit  of  advancing  on  pig  iron 
stored  in  a  certain  borrower's  own  yard,  or  in  the  yard  of  the  blast  furnace  where 
it  was  produced.  This  customer  having  once  removed  this  iron  so  advanced 
upon,  the  bank  adopted  the  plan  of  leasing  a  small  area  in  some  furnace  yard, 
fencing  it  in.  placing  it  under  lock  and  key,  and  requiring  iron  advanced  on  to  be 
deposited    there.      This    plan    proved    effectual. 

67  There  are,  however,  cases  at  times  which  shake  a  banker's  confidence  in 
this   theory. 

The  writer  once  had  to  do  with  a  draft  secured  by  a  bill  of  lading  for  goods 
signed  by  the  shipping  officer  of  a  railway  station  on  the  company's  regular  form. 
But  such  goods  were  never  delivered  at  the  destination  indicated.  And  investi- 
gation brought  out  the  fact  that  such  goods  were  never  received  at  the  station. 
The  bank  contended  that  the  railway  company  was  liable  for  the  acts  of  its  own 
oflficer  done  In  the  regular  course  of  business.  This  was  denied,  the  company 
claiming  that  they  were  only  liable  for  goods  they  had  actually  received.  And 
this  contention  was  upheld,  though  it  really  did  not  touch  the  pomt.  The  point 
was,  a  wrong  having  been  done  by  an  employee  of  the  company  in  the  ordinary 
course  of  his  duty,  who  is  to  suffer  for  the  wrong— the  company  that  employed 
him,  or  a  perfectly  Innocent  party? 

The  decision  Is  calculated  to  undermine  the  confidence  entertained  in  bills 
of  lading  as  security. 


SECURITY   AND   SECURITIES   IX   GENERAL.  203 

■possession?  And,  secondly,  will  he  take  due  care  of  them  and  not  let 
them  go  except  to  the  right  party?  And,  if  he  fails  to  do  either  of  these 
things,  is  he  of  sufiicient  responsibility  to  make  Jiis  ciigagcmeiit  good?'^^ 

In  Canada  and  the  United  States  the  issuing  and  advancing  of  these 
documents  is  carefully  regulated  by  law;  the  object  being  to  facilitate 
bank  advances  on  the  great  staple  productions  of  the  country  and  so  to 
assist  in  that  great  annual  movement  upon  which  all  internal  commerce 
depends. 

This  law  of  warehouse  receipts,  let  it  be  borne  in  mind,  traverses  the 
law  of  chattel  mortgage  in  two  respects.  The  ordinary  law  is  that  a 
bank  cannot  make  a  new  advance  on  the  security  of  chattels;  and  also,  if 
a  chattel  mortgage  is  given  to  secure  an  existing  debt,  it  must  be  entered 
in  a  public  registry  within  a  certain  nimaber  of  days.  But  the  warehouse 
receipt  law  enables  new  advances  to  be  made  on  goods,  and  gives  the 
lender  a  valid  title  to  them  against  all  comers,  subject  to  certain  restric- 
tions. It  also  dispenses  with  the  necessity  of  registration,  though  it  is 
often  contended  that  it  would  be  better  in  all  cases  if  registration  were 
required.  Under  this  law  bankers  can  advance  on  documents  in  the  same 
manner  that  they  discount  bills,  looking  to  the  names  of  the  parties  and 
considering  also  the  genuineness  of  the  document  itself. 

68  There  is  this  difference,  between  a  banker  advancing  on  goods  in  his 
•own  possession  and  advancing  on  a  warehouse  receipt,  that  the  document  may  be 
forged.  The  certificate  of  registration  may  be  forged  also,  and  the  banker  may 
be  deluding  himself  by  an  imagined  security  of  goods,  while  such  goods  have  no 
existence  whatever,  or  may  have  been  pledged  to  another  party  on  a  genuine 
document. 


CHAPTER   XXV I. 
SECURITY  AND  SECURITIES— Continued. 

Security  by  an  Owner's    Warehouse    Receipt — ^Bailee    Receipts — 
Bills  of  Lading — Security  on   Real   Property. 

IN  the  last  chapter  was  considered  the  security  afforded  for  advances 
on  goods  by  means  of  a  formal  document  acknowledging  receipt 
of  them  and  undertaking  to  deliver  them  when  called  for,  on  sur- 
render of  the  document.  The  legislation  respecting  these  documents, 
and  the  title  they  conveyed,  was  also  adverted  to.  In  all  these  two 
persons  were  concerned — the  person  who  deposited  the  goods  and  the 
person  who  undertook  to  take  care  of  them,  the  latter  being  a  warehouse- 
keeper,  or  wharfinger,  by  occupation.  But  in  process  of  time,  and  what 
may  be  called  the  evolution  of  business,  it  came  about  that  another  class 
of  receipts  or  certificates  wei-e  proposed  as  security.  The  borrower,  in 
small  towns  especially,  often  having  a  store,  warehouse  or  yard  of  his 
own,  the  question  was  asked,  why  should  he  not  be  the  warehouseman  of 
his  own  goods,  and  give  his  own  certificate  of  possession,  borrowing 
upon  that?  These  receipts  were  warehouse  receipts  undoubtedly,  and 
the  fraudulent  issuing  of  them,  or  making  away  with  the  goods,  would 
be  equally  an  offence  against  the  law.  It  thus  came  about  that  bankers 
ill  places  where  no  professional  warehouse-keepers  were  to  be  found 
became  willing  to  advance  monej'  on  this  kind  of  document. 

The  law  for  some  time,  however,  did  not  recognize  them  as  convey- 
ing title  in  the  same  manner  as  the  former  documents  did.  But  in  time 
especial  clauses  were  added  to  the  Banking  Act  legalizing  this  class  of 
receipts,  but  defining  very  strictly  the  kind  of  goods  for  which  such 
certificates  could  be  given.  Strict  provision  was  also  made  that  the 
document  should  be  handed  to  the  banker  at  the  time  an  advance  was 
made,  or  that  the  banker  should  hold  a  written  engagement  from  his 
customer  to  lodge  such  a  document  with  him.  In  every  other  respect  the 
provisions  relating  to  the  older  classes  of  receipts  were  made  applicable 
to  these  receipts. 

It  is  evident,  that  these  restrictions  have  in  view  the  prevention  of 
what  might  prove  to  be  a  great  abuse,  viz.,  that  a  dealer  in  imported  or 
manufactured  goods — such  as  dr}'  goods,  groceries,  etc.,  should  h.ive  it 
in  his  power,  while  such  goods  are  still  unpaid  for,  and  without  remov- 
ing them  from  his  shelves,  to  pledge  them  for  advances,  thus  making  it 
easy  to  deceive  or  defraud  his  creditors.  These  creditors,  under  such 
circumstances,  would  find  that  the  stock  in  trade  on  which  they  relied 
for  pa3'ment  had  been  so  pledged  as  to  give  a  bank  a  title  to  it,  thus  creat- 
ing a   preference   of  a  very  inequitable  kind.      The  Act  therefore,  very 


SECURITY   AND   SECURITIES   IX    GENERAL.  205 

properly  limited  the  class  of  goods  that  could  be  pledged  by  the  owner's 
simple  certificate  to  such  articles  of  merchandise  as  are  invariably 
bought  for  cash,  viz.,  all  kinds  of  agricultural  and  natural  productions. 
There  could  tlien  be  no  conflict  of  claim  between  one  class  of  creditors 
and  another. 

These  documents  being  thus  legalized,  gradually  came  to  liave,  in 
the  minds  of  inexperienced  bankers,  the  same  weight  and  consideration 
that  attaclied  to  the  certificates  of  a  professional  wareliouseman.  And 
in  the  consideration  of  the  various  classes  of  loans  and  discounts  in 
their  books  tliey  would  describe  these  as  "secured"  and  place  them  in 
the  same  category  as  advances  secured  by  goods  stored  in  a  public  ware- 
house or  wharf. 

But  little  consideration  is  required  to  show  that  there  is  a  fundamental 
difference  between  them.  The  warehouse  receipt,  or  dock  warrant, 
properly  so  called,  is  the  receipt  of  a  person  who  has  no  interest  in  the 
goods  except  to  take  care  of  them,  and  deliver  them  in  good  order  when 
called  upon.  This  is  his  business.  For  this  service  he  receives  due  re- 
muneration, and  his  whole  reputation  and  standing  are  involved  in  per- 
forming the  duty  well.  He  is  practically,  so  far  as  the  banker  is  con- 
cerned, in  the  position  of  a  guarantor  holding  specific  goods  with  which 
to  meet  his  obligation.  There  is  no  inducement  to  him  to  give  a  certifi- 
cate unless  he  has  the  goods;  and  every  possible  inducement  to  refuse 
to  give  them  up  except  to  the  banker  who  holds  his  pledge. 

These  safeguards,  however,  are  wholly  wanting  when  a  man  bor- 
rows money  on  his  own  pledge.  There  is  nothing,  except  a  borrower's 
honor,  to  prevent  his  writing  out  a  certificate  before  he  has  the  goods 
in  possession,  or  for  a  larger  quantit}'  than  he  actually  has  in  store,  or 
for  goods  of  a  higher  brand  tlian  he  has  in  stock.  Even  if  a  banker 
takes  the  precaution  to  have  the  goods  examined,  it  is  next  to  impossible 
for  him  to  arrive  at  an  accurate  statement,  either  as  to  quantity  or 
value.  Then,  as  to  the  other  point  of  safe  custody  and  delivery,  it  is 
impossible  to  prevent  the  owner,  when  in  possession,  from  taking  the 
goods  into  the  stock  which  is  being  manufactured,  and  selling  and  de- 
livering the  goods  produced.  Nay,  it  is  not  uncommon  for  a  banker  to 
give  his  consent  to  this,  either  in  general  terms  or  specifically,  either 
verbally  or  in  writing,  so  that  an  understanding  is  established,  or  sup- 
posed by  the  borrower  to  be  established,  such  as  can  be  pleaded  in 
court  against  a  charge  of  wrong-doing.  From  all  which  it  is  evident 
that  the  pledges  of  the  owner  of  goods  are  not  to  be  looked  on  in  the 
light  of  an  actual  security.  It  does  not  make  secure  in  the  manner 
that  intervention  of  a  third  party  does.  It  amounts,  in  reality,  only  to 
an  additional  promise  on  the  borrower's  part.  Having  already  written 
a  promise  to  repay  a  certain  sum  of  money  on  a  certain  day,  he  adds 
to  it  a  promise  to  deliver  certain  goods  on  a  certain  day.  It  is  only  a 
promise  added  to  a  promise,  both  by  the  same  person,  and  not  an  en- 
gagement by  another  person. 


sot)  BANKING    AND    COMMERCE. 

There  is,  however,  this  to  be  said,  that  while  the  pledge  of  a  prom- 
isor is  weak  in  not  making  sure  that  the  goods  pledged  are  actually 
where  they  are  represented  to  be,  it  is  a  strong  security  when  the  goods 
are  actually  there,  and  the  borrower  becomes  unable  to  pay  his  debts. 
Thev  cannot  be  seized  in  judgment;  and  they  do  not  pass  to  an  assignee 
in  case  of  insolvency.  Tlie  law  holds  them  strictly  for  the  banker,  until 
the  debt  secured  by  them  is  paid.  But  he  must  be  able  to  prove,  in  case 
of  dispute,  that  the  debt  attaches  specifically  to  those  goods.  Neither 
a  proper  warehouse  receipt  nor  a  borrower's  own  pledge  can  attach 
generally  to  a  debt  due  to  a  banker.  A  specific  sum  of  money  that  can 
be  so  identified  must  be  lent  on  certain  specific  goods  that  can  be  identi- 
fied; otherwise  the  security  will  not  hold. 

There  is,  however,  this  safeguard;  that  a  pledge  of  this  character, 
if  not  bona  tide,  is  subject  to  the  same  criminal  penalties  that  attach  to 
a  document  issued  by  a  third  party.  If  a  man  gives  a  banker  a  pledge 
on  goods  that  do  not  exist,  or  are  not  what  he  represents  them  to  be, 
he  exposes  himself  to  a  criminal  prosecution.  And  if,  after  giving  a 
pledge  on  goods  that  actually  exist,  he  removes  the  goods  without  the 
banker's  consent  or  without  accounting  for  them,  he  is  equally  guilty. 
Such  is  the  law;  and,  to  a  certain  extent,  it  is  efficacious.  But  when  a 
trader  in  exportable  goods  becomes  pressed,  as  he  sometimes  may  be 
unknown  to  his  banker,  the  temptation  is  very  great  to  raise  money  by 
the  easy  process  of  writing  out  a  pledge.  And  a  man,  without  any  in- 
tention of  ultimately  defrauding,  will  avail  himself  of  this  relief,  trust- 
ing that  he  may  be  able  to  redeem  the  pledge  in  course  of  business. 
Experience,  moreover,  has  proved  that  is  not  easy  to  obtain  conviction 
when  prosecution  is  resorted  to.  Juries  are  unwilling  to  convict  when  a 
plea  is  entered  that  there  was  an  undersianding  (that  dangerous  word) 
with  the  banker  that  goods  might  be  removed  in  case  they  were  needed 
for  the  borrower's  business — as  in  the  case  of  a  miller  who  has  pledged 
wheat  in  his  own  store  and  needs  it  to  fill  an  order  for  flour. 

The  sum  of  the  whole  matter  is  this,  that  individual  pledges  have  a 
real  value  with  men  of  probity  and  honor,  and  also,  that  with  men 
whose  sense  of  honor  is  not  high,  the  fear  of  punishment  will  ordinarily 
restrain  them  from  issuing  false  pledges,  or  removing  goods;  but  that 
this  fear  is  not  sufficient  "to  restrain  such  men  when  heavily  pressed  for 
money.  Further,  that  in  either  case,  if  the  goods  actually  exist,  and  the 
security  has  been  properly  taken,  the  pledge  will  hold  the  goods  for 
the  banker  in  case  of  judgment  or  insolvency. 

But  no  banker  of  experience  will  consider  a  debt  absolutely  secured 
by  reason  of  liis  holdinir  the  borrower's  pledge.'^" 

MA  oomnion  mistake  -with  regard  to  the  security  of  these  documents  hns 
arisen  when  thev  have  been  taken  from  manufacturers,  whose  stock  of  raw  ma- 
terials  Is  constantly  being  converted  Into  manufactured  goods.  The  raw  mate- 
rial In  the  vard  or  warehouse  today,  la  found  next  week  In  the  factory,  being 
replaced  by  other  raw  material  of  the  same  description,  but  not  that  upon  which 

the  money  was  lent.  

It  Is  sometimes  supposed  that  a  personal   pledge   can  be  given   for  a  general 


SECURITY  AND   SECURITIES   IN   GENERAL.  207 

Bailee   Receipts. 

In  the  case  of  all  goods  and  merchandise  pledged  to  a  banker,  the 
time  comes  when  they  must  be  removed;  and,  in  modern  business,  the 
removal  Avill  be  either  to  a  ship  or  to  a  railroad.  Now,  during  the 
process  of  removal  it  is  injpossiblc  that  the  security  before  mention,  d 
will  hold  the  goods.  They  must  be  released  from  the  warehouseman's 
custody,  and  until  they  are  loaded  on  board  ship  or  placed  in  custody 
of  a  railway  company,  a  hiatus  necessarily  arises  in  which  there  is  no 
security  to  the  banker  at  all,  except  what  is  generally  known  as  a 
"bailee  receipt."  This  is  a  document  somewhat  similar  to  the  pledge 
which  has  been  discussed,  and  is  given  by  the  owner  of  the  goods  during 
the  time  they  are  in  transit.  In  this  document  the  owner  acknowledges 
to  have  received  certain  specified  goods  for  shipment  by  rail  or  steamer, 
as  may  be;  constituting  himself  a  bailee  for  the  same,  and  engaging  to 
deliver  them  as  directed.  A  breach  of  this  engagement  is  a  criminal 
offence.  Upon  the  lodgment  of  such  a  bailment  with  the  banker,  the 
custom  is  to  surrender  the  warehouse  receipt,  to  be  exchanged,  after  rea- 
sonable delay,  for  a  steamship  bill  of  lading — or  a  railway  receipt. 
When  a  banker  gets  either  of  these,  his  anxiety  is  generally  at  an  end, 
always  supposing  that  the  goods  are  worth  what  he  has  advanced  and 
that  the  document  is  genuine. 

Bills   of   Lading   and   Railway   Receipts. 

When  the  process  previously  described  has  issued  in  the  shipment 
of  goods  by  steamer,  the  captain  or  agent  signs  that  important  docu- 
ment called  a  Bill  of  Lading,  making  the  ship  and  its  owners  respon- 
sible for  safe  carriage,  and  delivery  of  the  goods.  This  document 
insures  that  the  goods  are  on  their  way  to  a  definite  destination.  The 
owner  of  the  goods,  who  has  had  them  in  his  own  charge,  for  a  time, 
now  draws  upon  a  purchaser  or  consignee  and  attaches  the  bill  of  lading 
to  the  draft  together  Avith  a  document  of  insurance;  the  law  giving  the 
banker  the  same  position  now  with  regard  to  the  goods  that  he  pre- 
viously had  as  the  holder  of  a  warehouse  receipt.  The  goods  on  that 
ship  are  his,  until  the  draft  is  paid,  and  the  security  to  the  banker  on 
the   transaction    is    as   complete    as    a   mortgage   on    real    estate    is    to    a 

stock,  let  us  say,  of  iron  in  the  yard,  or  wool  in  the  warehouse,  such  as  may 
be,  at  any  time,  found  there.  But  this  kind  of  pledge  will  not  stand  the  test 
of  a  lawsuit  or  an  assignment,  unless  it  can  be  shown  that  the  stock  has  not 
been  changed  since  the  pledge  was  given.  The  law  does,  however,  provide  that 
when  wheat  is  changed  into  flour,  logs  into  lumber,  hides  into  leather,  or  dressed 
hogs  into  pork,  the  pledge  shall  attach  to  the  manufactured  article,  if  the  sam<' 
can  be  identified,  which  is  sometimes  a  difl^cult  business.  But  bankers  hav 
learned  to  take  care,  in  lending  money  upon  pledges  of  this  kind,  that  the  'bor- 
rower shall  have  no  other  creditors.  There  is,  too,  a  method  of  lending  upon 
raw  material,  which  is  prevalent  in  the  lumber  trade,  namely,  that  the  logs 
are  branded  with  a  certain  mark,  by  which  they  are  identified  as  the  goods  that 
have  been  advanced  upon. 


208  BANKING    AND    COMMERCE. 

money-lender.  The  one  point  a  banker  now  has  to  think  about  is 
whether  the  goods  are  worth  the  amount  drawn  against  them.  This 
consideration,  however,  is  dealt  with  in  the  chapter  on  trade  bills,  or 
bills  drawn  in  sterling  money. 

Having  thus  considered  the  various  points  arising  out  of  security 
by  endorsement  or  guarantee,  and  also  by  security  of  goods,  either  in 
situ  or  transitu,  it  is  in  order  to  consider  other  forms  of  security  met 
with  in  banking. 

Of  these  some  are  met  with  in  the  active  prosecution  of  business, 
while  some  come  to  a  banker  when  additional  security  is  demanded.  The 
last  will  be  treated  of  first. 

In  ordinary  loans  the  customer  offers  security  at  the  inception.  In 
real  estate  it  is  the  banker  that  demands  it. 

Securities  Resting  on  Real  Estate. 

The  banking  law  of  Canada  differs  from  that  of  Great  Britain,  in 
that  it  prohibits  loans  on  real  estate  security.  A  banking  transaction 
cannot  be  initiated  by  a  mortgage  on  real  property.  Former  disastrous 
experience  led  to  this  prohibition,  and  more  recent  experiences  in  Aus- 
tralia, of  a  much  more  distressing  character,  have  shown  the  wisdom 
of  adhering  to  it.  One,  at  least,  of  the  greater  banks  of  Canada,  after 
a  long  career  of  usefulness  to  the  infant  community,  was  finally  forced 
to  succumb  owing  to  the  fact  of  its  resources  having  been  engulfed,  so  to 
speak,  by  real  estate  transactions.  In  the  days  when  this  bank  was 
doing  its  most  active  business,  the  loan  and  mortgage  companies,  row 
so  common,  were  almost  unknown.  Only  one  company,  an  English 
one — "The  Trust  and  Eoan  Company  of  Canada" — existed.  It  was  im- 
possible, however,  for  this  one  company  to  meet  the  needs  of  the  vast 
stretch  of  country — then  known  as  Upper  Canada — and  now  called 
Ontario.  It  came  naturally  about,  therefore,  that  as  loans  were  re- 
quired for  clearing  land,  improving  property,  and  building  stores,  nu'lls 
and  factories,  recourse  was  had  to  the  banks  of  the  time;  and  to  this 
one  bank  in  particular.  The  true  principles  of  sound  banking  were 
little  understood  in  these  early  days.  If  a  man  was  posses.sed  of  a 
piece  of  land,  large  or  small,  encumbered  or  unencumbered,  he  was  con- 
sidered to  be  an  eligible  customer.  Many  of  the  loans  made  were  paid 
off  in  the  course  of  events,  but  large  numbers  were  not,  and  remained 
on  the  bank's  books  year  after  year.  It  thus  came  about  that  the  mass 
of  undigested  and  indigestible  securities  in  the  shape  of  promissory 
notes  of  real  estate  owners,  many  of  whom  were  domiciled  in  the  back 
woods  of  those  days,  went  on  constantly  increasing,  until  the  bank 
could  carry  them  no  longer,  and  fell  buried,  so  to  speak,  undfr  -heir 
ruins."" 

70  It  seems  hard  to  realize,  and  might  be  deemed  Incredible  to  one  not  famil- 
iar with  the  early  history  of  the  country,  that  the  author  was  well  acquainted 
with   a   resident   of   Toronto   who   rememl)ere(l   the   time   when    the   whoile   stretch 


SECURITY  AND   SECURITIES   IX    GENERAL.  20[) 

Yet,  securities  on  real  estate  have  their  use  to  a  banker  who  knows 
how  to  use  them,  and  have  saved  many  an  account  from  degrnerating 
into  a  bad  debt.  For  although  real  property  is  a  bad  foundation  for  a 
banking  loan,  when  it  is  the  only  foundation,  it  is  a  strong  s':p]iort  to 
a  mercantile  account  whose  main  security  is  of  a  commercial  character. 
It  enables  a  banker  to  nurse  a  customer  through  bad  times  with  con- 
fidence when  otherwise  he  would  be  obliged  to  allow  him  to  succumb. 
This  is  so  well  understood  in  England  that  a  lien  upon  a  customer's 
property  is  considered  one  of  a  banker's  strongest  safeguards,  and  as 
the  law  allows  a  lien  to  be  created  by  the  simple  deposit  of  title  deeds 
with  a  memorandum  describing  the  purpose,  such  a  hold  upon  a  custom- 
er's real  property  is  very  common.  In  Canada,  however,  no  such  custom 
exists.  A  banker's  lien  cannot  be  established  without  a  regular  mort- 
gage, duly  registered,  and  this  must  be  after  the  inception  of  a  loan, 
not   at  the  time. 

The  term  Real  Estate,  though  definite  enough  in  law,  is  so  indefinite 
in  fact  that  some  bankers  have  almost  prohibited  the  use  of  it  in  corre- 
spondence with  their  branches.  When  the  manager  of  a  country  branch, 
for  example,  writing  of  a  somewhat  doubtful  account,  informs  the  board 
that  it  is  secured  by  "real  estate,"  he  will  certainly  be  asked  for  more 
definite  information;  and  very  properly,  for  real  estate  is  of  so  varied 
a  character  that  unless  specific  information  is  given,  the  word  conveys 
no  practical  meaning,  so  far  as  actual  security  is  concerned. 

It  is  desirable  then  to  consider  real  estate  from  a  banking  point  of 
view,  and  to  point  out  what  property  is  desirable  and  valuable  in  that 
connection,  and  what  is  undesirable  or  worthless. 

Real  property  in  Canada  may  be  classed  under  the  following  heads: 

(1)  Farms. 

(2)  Land  capable  of  being  made  into   farms. 

(3)  Stores  or  dwellings  in  towns,  cities  or  villages. 

(4)  Vacant  lots  in  towns,  cities  or  villages. 

(5)  Factories,  saw  mills,  tanneries,  etc. 

(6)  Timbered  lands,  when  owned  as  a  freehold  and  used  for  lum- 
bering. 

(7)  Mines. 

Any  one  or  more  of  these  descriptions  of  real  property  may  be 
offered  to  a  banker  as  security  for  an  existing  debt,  and  it  is  certainly 
the  business  of  a  well-informed  banker  to  make  himself  sufficiently  ac- 
quainted with  them  all  to  be  able  to  judge  what  value  to  attach  to  the 

of  country  between  that  city  and  T^ake  Hnrnn  was  almost  unbroken  forest.  Only 
three  settlers  had  penetrated  into  its  vast  solitudes,  fighting  their  way  through 
bush  and  swamp  and  slowly  making  clearings,  in  a  region  entirely  destitute  of 
roads,  bridges  or  dwellings;— then  given  up  to  bears,  wolves,  and  Indians,  but 
now  full   of  prosperous   towns   and  cities. 

It   was   some   time  after  this  that  the  Bank  of  Upper  Canada  was  established; 
but  its   early  days  were  passed  when  forests    covered    most    of    Ontario    and    the 
towns   and   cities   of   the   present   day   were  mere  hamlets. 
14 


210  BANKING    AND    COMMERCE. 

security  or  if  it  has  any  practical  value,  present  or  prospective.  An 
intelligent  manager  of  a  branch  will  certainly  make  himself  acquainted 
with  the  conditions  and  value  of  farm  and  town  property,  in  his  dis- 
trict. And  a  general  manager  or  president  will  always  be  adding  to 
his  stock  of  information  with  regard  to  property  in  those  parts  of  the 
country  where  the  business  of  the  bank  is  carried  on. 

When  a  banker  is  offered  security  on  real  property  the  first  point  to 
consider  is  what  will  be  expected  of  him  if  he  concludes  to  take  it.  In 
some  cases  a  debt  may  be  in  such  a  doubtful  position  that  a  banker 
would  take  any  security  he  could  get  (any  security  being  better  than 
none)  not  scrutinizing  it  very  carefully  except  to  obtain  assurance  that 
the  taking  of  it  involves  no  responsibility.  But  real  estate  is  sometimes 
offered  by  a  debtor  who  is  in  a  comparatively  good  position,  it  being 
perfectly  understood,  though  it  is  not  formally  expressed,  that  the 
banker  in  consideration  of  the  security  will  be  less  exacting  and  more 
indulgent  in  his  treatment  of  the  account.  And  this  he  may  be  in  various 
ways. 

When  security  is  taken  under  these  circumstances,  a  banker  will 
naturally,  to  begin  with,  arrive  at  an  understanding  of  what  value  the 
property  is  as  security;  where  situated,  of  what  character,  whether  the 
debtor  has  a  clear  title  to  it,  and  whether  it  is  clear  of  encumbrance. 
These  last  are  both  legal  points,  and  upon  them  both  only  the  bank's 
solicitor  can  give  accurate  information. 

If  the  title  is  clouded,  a  banker  will  do  wisely  to  refrain  from  taking 
security  until  it  is  cleared ;  otherwise,  he  may  find  himself  made  a  party 
to  a  troublesome  lawsuit.  But  if  the  property  is  desirable  in  itself,  he 
will  do  well  to  insist  on  steps  being  taken  to  have  the  title  cleared.  This 
preliminary'  being  arranged,  the  banker  will  next  have  to  consider  the 
question  of  encumbrance.  If  there  is  no  encumbrance  at  all,  the  case 
will  be  simple.  Whatever  value  there  is  in  the  property  will  accrue  to 
the  banker's  benefit.  But  if  there  is  an  encumbrance,  a  banker's  judg- 
ment and  experience  require  to  be  called  into  play  in  dealing  with  it. 

No  sane  man  would  ever  lend  money,  as  a  matter  of  business,  on  en- 
cumbered property;  or,  at  any  rate,  if  he  thought  well  to  lend  at  all,  he 
would  lend  enough  to  pay  off  the  first  mortgage.  But  it  may  be  well 
worth  a  banker's  while  to  get  security  for  an  existing  debt  on  an  en- 
cumbered property.  Everything  depends  on  the  amount  of  the  enium- 
brance.  If  that  amount  is  not  more  than  one-quarter  the  assumed,  or 
assessed  value  of  the  property^  the  probability  is  that  a  second  mortgage 
would  yield  him  something.  But  if  the  encumbrance  amounts  to  half 
the  value  of  the  property,  tlic  security  of  a  second  mortgage  is  problem- 
atical. The  valuation  may  be  too  high;  it  generally  is;  or  the  interest 
of  the  first  mortgage  may  have  accumulated  and  rank  as  an  addition 
to  it.  It  has  happened,  in  a  banker's  experience,  that  the  unpaid  interest 
has  swallowed  up  all  reversionary  interest  in  a  valuable  property,  mak- 
ing the  second  mortgage   worth  nothing. 


SECURITY   AND   SKCUIUTIKS    IN   GENKUAL.  21 1 

There  arc  other  considerations  also.  Before  anything  can  be  re- 
covered from  a  second  mortgage  a  banker  will  find  it  necessary  to  pay 
off  the  first.  He  thus  adds  more  to  an  already  existing  debt.  Yet,  wlitii 
property  comes  to  be  sold,  the  fact  that  a  bank  holds  it  has  a  depreciat- 
ing tendency,  as  all  experience  proves.  A  banker,  therefore,  may  have 
the  mortification  of  finding  that  a  property,  when  he  has  the  wliole 
benefit  of  it,  will  not  yield  him  as  much  as  he  paid  for  the  first  mort- 
gage; making  it  apparent  that  he  would  have  been  in  a  better  position 
if  he  had  never  taken  a  second  security  at  all.  A  banker,  too,  has  to 
consider  also  that  while  he  must  disburse  cash  in  paying  off  a  first  mort- 
gage, it  is  almost  an  impossiblity  to  sell  without  accepting  a  mortgage 
for  a  large  part  of  the  pxirchase  money.  He  thus  finds  that  to  the 
original  debt,  which  was  more  or  less  of  a  lock-up,  he  has  added  another, 
which  being  in  the  shape  of  a  mortgage,  is  practically,  a  lock-up  also. 

The  question  of  encumbrances  deserves  especial  care  when  the  prop- 
erty is  connected  with  a  manufacturing  business.  If  the  business  is  un- 
successful, the  property  will  depreciate  by  an  amount  that  would  seem 
incredible  to  an}'  but  one  who  has  had  experience. 

It  has  sometimes  happened  to  a  banker  to  have  the  mortification  of 
finding  that,  when  he  has  paid  off  an  encumbrance  of  only  one-quarter 
of  the  estimated  value  of  manufacturing  propcrt}',  the  sale  has  not 
realized  even  half  of  this  paltry  sum. 

The  best  form  of  real  estate  security,  generally  speaking,  is  that  on 
shops  and  offices  in  one  of  the  main  streets  of  a  commercial  city.  The 
very  worst,  as  a  rule,  is  a  mill,  a  factory,  or  a  tannery.  A  banker  \n\\. 
find  it  prudent,  as  a  rule,  though  he  may  take  such  a  security,  never  so 
to  rely  upon  it  as  to  be  more  indulgent  either  as  to  time,  rate,  or  amount 
than  he  would  be  had  he  no  such  security  at  all.  And  this  more  par- 
ticularly if  the  property  is  encumbered,  no  matter  how  small  the  en- 
cumbrance may  seem. 

The  securities  that  bankers  may  take  in  the  active  prosecution  of 
their  business  are  so  fully  opened  up  in  the  chapters  on  Loans  that  it 
is  needless  to  refer  to  them  again.  The  only  additional  remark  needed 
is  to  state  that  a  merchant,  sometimes,  instead  of  discounting  a  certain 
amount  of  trade  bills  will  obtain  an  advance,  pledging  the  bills  as  secur- 
ity. This  may  be  a  more  economical  process  in  case  he  only  requires  the 
loan  for  a  shorter  time  than  the  bills,  on  an  average,  have  to  run. 


CHAPTER   XXVII. 

BANKING  AND  COMMERCIAL  LOSSES. 

Various    Sources    of    Loss — Particular    Instances    Cited — City    of 
Glasgow  Bank  Collapse. 

THESE   are   coupled   together   in   this   treatise   for   the   reason   thai 
there  is  generally  a  very  close  connection  between  them. 

A  bank  cannot  lose  money  by  a  commercial  customer  until  that 
customer,  except  in  the  cases  of  deliberate  fraud,  has  lost  all  his  capital, 
and  is  unable  to  pay  his  debts.  It  is  also  not  seldom  the  case  that  a  mer- 
chant fails  by  reason  of  the  losses  he,  in  his  turn,  sustains  by  his 
customers. 

He  may  indeed,  especially  in  some  branches  of  trade,  fail  because 
of  a  heavy  fall  in  the  price  of  some  commodity  he  deals  in.  This  is  a 
contingency  that  every  wise  merchant  will  take  special  means  to  pro- 
vide against. 

Thtn  there  are  the  losses  that  a  merchant  may  suffer  by  speculation. 

These  are  not  legitimate  losses.  They  ought  not  to  occur  at  all. 
But  they  do  occur  in  sufficient  numbers  to  make  it  necessary  for  a  banker 
to  take  them  into  account. 

Both  banking  and  commercial  losses  are  much  influenced  by  the 
condition  of  the  trade  of  the  district  in  which  operations  are  carried  on. 
also  by  times  of  prosperity  or  depression,  either  in  a  particular  district 
or  in  the  whole  country. 

It  is,  for  example,  will  known  that  failures  are  much  more  common 
in  new  countries  than  in  old;  and  in  the  newer  parts,  let  us  say,  of  the 
United   States  and  Canada  than  in  the  older. 

They  are  also  more  common,  other  things  being  equal,  amongst  men 
in   new  industries  than  in  well  established  ones. 

Of  all  these  things  a  banker  must  of  necessity  take  more  account 
than  a  merchant,  for  the  latter  in  doing  business  in  a  new  community,  if 
he  incurs  greater  risks,  can  generally  make  greater  profits.  But  a 
bc':nker  is  rarely  able  to  do  this;  hence  the  importance  to  him  of  care  in 
having  loans  adecpiately  secured ;  also  of  scrutinizing  business  bills  so 
as  to  guard  against  mere  accommodation  paper  being  taken  under  that 
guise.  With  such  precautions  as  every  banker  ought,  in  the  reason  of 
things,  to  take,  it  should  be  tlie  rule,  that  even  if  his  customers  fail,  the 
security  should  ])e  capable  of  such  realization  as  will  save  him  from  loss. 

Passing,  liowever,  from  general  observations  to  particulars,  it  is 
necessary  to  take  note  of  both  commercial  and  banking  losses  as  matters 
of  fact;  togetlier  with  the  reasons  for  failure  in  one  case  and  loss  in  the 
other. 


BANKING    AND    COMMERCIAL    LOSSES.  213 

Pauticular  Instaxcrs  oi-  Losses. 

The  most  effective  wny  of  doing  this,  and  it  will  add  point  to  all 
observations  on  the  subject,  will  be  to  cite  particular  instances  of  losses. 
Most  of  these  have  come  under  the  author's  own  observation,  and  have 
made  an  indelible  impression  on  his  memory.  The  rest  were  well  kno%vn 
at  the  time  to  the  commercial  and  banking  world.  Names,  dates,  and 
places  will,  of  course,  not  always  be  given,  for  it  would  not  be  proper 
to  do  it;  but  the  cases  cited  may  be  relied  upon  as  narratives  of  actual 
events;  every  one  of  them  conveying  some  practical  lesson  for  future 
guidance. 

More  than  fifty  years  ago  no  goods  in  a  certain  line  of  English  man- 
ufacture were  of  higher  finish  or  more  beautiful  design  than  those  made 
in  the  great  establishment  of  B.  &  Co.,  in  Yorkshire.  The  firm  had  a 
warehouse  in  London,  and  a  large  part  of  the  goods  they  produced  were 
sent  there,  and  sold  to  wealthy  residents  of  the  capital,  or  distributed 
throughout  the  Kingdom  from  that  centre.  The  leading  noblemen  of  Eng- 
land were  their  customers;  and  on  one  occasion  they  manufactured  a 
magnificent  set  of  goods  for  the  King. 

The  members  of  the  firm  lived  in  expensive  style,  and  took  the  lead 
in  the  fashionable  society  of  the  neighborhood.  But  to  the  bankers  of 
the  district,  they  came,  in  course  of  time,  to  be  kno^vn  as  continually 
short  of  money. 

They  were,  however,  the  kind  of  people  sometimes  called  "clever 
financiers,"  and  having  several  banking  towns  within  easy  distance,  they 
managed  for  a  considerable  time  to  get  cash  for  checks,  by  drawing 
sometimes  on  one  bank  and  sometimes  on  another,  varying  the  operation 
by  drafts  upon  their  house  in  London;  that  house  repeating  the  opera- 
tion conversely. 

But  as  time  went  on  these  I<ondon  drafts  occasionally  Avent  to  pro- 
test. Bankers  in  the  neighborhood  got  more  and  more  shy,  and  at 
length  refused  to  cash  their  checks  or  bills  at  all.  Finally,  the  firm  came 
to  a  stop,  and  went  into  bankruptcy. 

When  the  accounts  in  bankruptcy  were  presented,  the  creditors  were 
astonished  to  find  that  a  large  landowner  in  the  neighborhood,  to  whom 
their  works  belonged,  was  a  creditor  for  a  sum  representing  the  accumu- 
lated rental  of  some  twenty  years,  or  about  £20,000  and  interest !  This 
rent,  his  steward  (with  his  own  good-natured  concurrence)  had  allowed 
to  run  on  year  after  year  without  pressing  for  payment,  largely  out  of 
consideration  for  the  workmen  employed  in  the  establishment. 

The  estate  paid  practically  notliing.  The  works  were  never  re- 
opened. The  family  disappeared  from  the  district.  Many  local  credi- 
tors sufi'ered  losses  they  could  ill  afford,  but  the  bankers  spoken  of  had 
been  wise  enough  to  act  upon  indications  of  weakness;  and,  having 
taken  measures  in  time,  lost  practically  nothing. 

The  cause  of  this  collapse  might  be  largely  traced  to  the  good  nature 


214  BANKING    AND    COMMERCE. 

of  the  landlord ;  for  it  enconrasied  the  firm  in  a  reckless  style  of  doing 
busiru'ss. 

Of  artistic  tastes  themselves,  and  fond  of  new  designs,  they  were 
continually  bringing  out  rare  and  expensive  styles  of  goods;  concerned 
only  with  keeping  up  their  reputation,  careless  whether  they  were  mak- 
ing profits  or  not.  They  were  in  reality  living  upon  their  landlord  dur- 
ing all  the  years  of  the  business;  and  he,  of  course,  was  the  chief  suf- 
ferer by  the  failure.  If  he  had  done  his  duty  to  himself  and  his  estate, 
they  would  have  been  compelled  to  manage  their  business  so  as  not  only 
to  make  beautiful  goods,  but  to  make  profits  (or  retire)  ;  and  might  have 
become  a  wealthy  and  jirosperous  concern,  as  numbers  of  other  manu- 
facturers in  that  district  had  done  and  are  doing  at  this  day.  But  the 
good  nature  of  their  landlord  was  their  ruin.  And  it  has  to  be  added 
that  too  easy  a  supply  of  money  has  paved  the  way  to  ruin  of  many 
a  man  in  Canada. 

Some  years  after  these  events  the  commercial  community  of  Liver- 
pool was  startled  to  learn  that  one  of  the  leading  banks  of  the  city  was 
in  difficulties,  and  had  been  compelled  to  apply  to  the  Bank  of  England 
for  assistance.  They  were  still  more  surprised  to  learn  the  cause  of  the 
embarrassment,  which  proved  to  be  Avholly  owing  to  inordinate  advances 
to  a  single  firm!  This  firm  was  in  the  habit  of  receiving  consignments 
of  merchandise  from  foreign  houses  on  a  very  extensive  scale,  and  ac- 
cepting bills  against  them.  This  was  their  business.  They  had  carried 
it  on  successfully  for  manj-  years  and  had  prospered. 

At  this  time,  however,  the  financial  and  mercantile  position  had  be- 
come clouded.  Markets  were  dull.  Goods  were  difficult  to  sell,  and 
steadily  falling  in  value.  Meanwhile  the  house  went  on  accepting  as 
usual.  But  their  acceptances  were  constantly  maturing,  and  not  being 
willing  to  sacrifice  the  interests  of  distant  consignees,  instead  of  bringing 
their  goods  to  sale,  they  warehoused  them,  obtaining  advances  from  the 
bank  to  retire  acceptances. 

It  so  happened  that  at  this  time  the  manager  of  the  bank,  well 
known  as  an  able  man  in  the  community,  was  absent  for  a  considerable 
period  from  ill-health.  He  had  gone  abroad,  and  it  was  difficult  to 
communicate  with  him.  The  second  officer  and  the  directors  had  not  the 
nerve,  and  did  not  care  to  take  the  responsibility,  of  compelling  the 
goods  advanced  on  to  be  sold,  but  went  on  making  advances,  hoping  for 
a  turn  of  the  tide  which  Mould  save  the  house  from  ruin,  and  the  bank 
from  loss. 

Thus  the  advances,  which  were  only  some  £50,000  at  first,  went  on 
increasing  until  they  were;  more  than  ten  times  as  much,  whilst  the 
warehouses  of  the  port  were  becoming  overstocked  with  merchandise 
that  was  steadily  going  down  in  value. 

The  situation  was  bccoining  terribly  serious.  To  comi)el  sales,  or 
refuse  further  advances,  would  inevitably  ruin  the  firm,  and  result  in 
enornious  loss  to  the  bank,  besides  demoralizing  the  market  and  inflict- 


BANKING    AND    COMMERCIAL    LOSSES.  215 

ing  loss  on  other  customers.  Under  the  circumstances  the  Acting  Man- 
ager and  the  Directors  became  utterly  demoralized.  So  all  drifted  on 
together,  the  advances  of  the  bank  mounting  up  week  after  week  until 
they  reached  the  enormous  sum  of  ,£750,000. 

Then  the  crisis  came.  The  resources  of  the  bank  were  exhausted. 
The  Bank  of  England,  Avhich  had  sometimes  made  advances  to  the  bank 
(as  is  often  the  case  in  England)  in  the  ordinary  course  of  business, 
was  made  acquainted  with  the  condition  of  affairs,  but  refused  to  in- 
tervene. The  bank  perforce  stopped  payment.  An  enormous  loss  re- 
sulted in  the  realization  of  the  warehoused  goods.  The  mercantile  firm 
went  into  bankruptcy;  but  scarcely  anyone  was  interested  in  the  firm 
except  the  bank,  which,  by  its  culpable  weakness  and  mismanagement. 
Lad  absorbed  the  whole  affairs  of  the  firm  into  its  own  hands. 

The  house  disappeared  from  the  seaport.  And  though  the  bank 
resumed  business  in  a  reduced  form,  it  never  recovered  its  credit  and 
prestige  and  was  finally  wound  up,  its  business  being  passed  over  to 
another  institution.  The  bank  was  the  Royal  Bank  of  Liverpool,  and  the 
time   1817. 

These  disastrous  consequences  all  ensued,  first,  from  the  folly  of  a 
mercantile  house  accepting  too  heavily  against  merchandise,  and  allow- 
ing it  to  accumulate  instead  of  bringing  it  to  sale;  then,  and  onward  con- 
currently in  the  bank's  making  advances  to  an  unreasonable  amount 
against  the  same  merchandise,  and  failing  in  the  courage  required  to 
face  the  situation  and  compel  sales;  until  finally  all  control  was  lost, 
and  the  bank  and  mercantile  firm  together  drifted  into  a  position  from 
which  there  was  no  recovery. 

The  whole  story  is  fraught  with  striking  lessons  to  both  merchants 
and  bankers.  There  was  not,  however,  a  suspicion  of  wrong-doing  or 
fraud  by  either  party.  All  that  could  be  alleged  was  a  terrible  deficiency 
of  good  judgment  and  nerve. 

City  of  Glasgow  Bank  Collapse. 

This,  however,  could  not  be  said  of  the  frightful  collapse  of  certain 
mercantile  firms  and  the  City  of  Glasgow  Bank  which  occurred  some 
years  afterward.  That  collapse  was  a  case  of  mercantile  ambition  grad- 
ually developing  operations  spread  over  nearly  all  the  markets  of  the 
world,  partly  legititnate,  but  in  the  end  grossly  illegitimate;  also  of 
banking  ambition,  aiming  to  carry  larger  accounts  than  any  bank  in  the 
country;  both  finally  (nding  in  the  most  astounding  financial  frauds  and 
disasters  of  the  nineteenth  century.  Of  these  operations  at  first  there 
was  nothing  worse  to  be  said  than  that  they  were  far  too  extended  for 
the  capital  of  the  firms  interested,  and  far  too  extended  for  the  bank 
itself  to  encourage:  by  advances.  After  the  operations  of  the  firms  be- 
came manifestly  unprofitable,  the  bank  might  have  brought  the  whole 
to  a  close  with  a  loss  of  £50,000  or  £100,000  at  most.  But  this  the 
directors   refused   to   face,   and   went    on   making   advances,   hoping    for 


216  RANKING    AND    COMMERCE. 

a  turn  in  the  tide  which  never  came.  Besides  this,  the  accounts  of  the 
firms  (there  were  four  in  all)  were  highly  profitable,  owing  to  the  mul- 
tiplicity of  exchange  operations  connected  with  them,  and  the  immense 
amount  of  interest  they  carried.  So  the  advances  went  on  increasing, 
until  tluy  amounted  to  sums  far  beyond  wliat  had  ever  been  heard 
of  in  Scotch  banking. 

Had  their  operations,  even  then,  been  all  based  on  merchandise,  they 
might  possibly  have  been  wound  up  with  no  worse  result  than  the 
bankruptc}^  of  the  firms,  and  the  loss  of  part  of  the  capital  of  the  bank. 

There  were  four  firms  interested  in  these  operations,  differing  only 
in  name,  for  they  were  so  interlaced  as  to  be  practically  one  concern. 
And  the  time  came  at  length  when  they  launched  into  great  operations 
in  real  estate,  and  bought  not  merchandise  only,  but  the  land,  buildings, 
and  plant  by  which  the  merchandise  was  produced,  and  this  in  many 
countries,  and  to   fabulous  amounts. 

By  this  time  their  operations  had  taken  the  shape  kno^vn  in  com- 
mercial circles  as  "plunging;"  that  is,  buying  heavily  and  selling  as 
heavily,  entirely  regardless  of  the  condition  and  prospects  of  any  mar- 
ket in  an}'  part  of  the  world. 

The  natural  consequences  ensued  in  the  shape  of  losses  to  enormous 
amounts.  The  bank,  however,  as  in  the  former  case,  was  under  weak 
management,  and  became  so  hopelessly  entangled  in  the  operations  of 
the  firms  that  they  had  to  "sink  or  swim"  with  their  customers. 

Then  when  the  purchases  of  property  by  the  firms  necessitated  ad- 
vances of  an  unprecedented  amount,  which  were  inevitably  of  the  nature 
of  a  "lock-up,"  the  bank  fell  into  a  terrible  snare  proposed  by  the 
astute  senior  partner  of  one  of  the  firms,  and  became  parties  to  the 
manufacture  and  negotiation  of  what  were  practically  fraudulent  bills. 
Facilis  descensus  Averni.  The  doAvnward  road  is  only  too  easy.  Once 
embarked  in  such  lines  of  operation  it  became  impossible  to  draw  back, 
and  the  authorities  of  the  bank  drifted  helplessly  on.  Yet  they  were 
well  aware  that  the  bank  was  "on  the  road  to  ruin,"  unless  indeed  by 
some  almost  miraculous  turn  of  affairs,  and  that  in  various  parts  of  the 
world,  these  properties  could  be  sold  for  sufficient  to  retire  the  debts  of 
their  customers  and  enable  the  fraudulent  bills  to  be  withdrawn. 

But  the  fortunate  turn  of  affairs  never  came. 

The  mass<s  of  bills  that  had  been  set  afloat  bearing  the  bank's  name 
were  constantly  falling  due  in  London.  To  enable  them  to  be  met,  other 
bills  were  drawn  purporting  to  be  for  difi'erent  transactions  of  an  origi- 
nal character,  but  which  were  nothing  more  than  fraudulent  renewals. 

The  firms,  as  is  the  manner  of  men  who  have  embarked  on  such 
desperate  enterprises,  entered  upon  other  engagements,  purchased  other 
properties  up  and  down  the  world,  (for  the  whole  world  was  the  theatre 
of  their  operations),  n)ade  contracts  for  other  masses  of  merchandise, 
all  of  which  necessitated  the  floating  of  other  masses  of  bills,  the  bank 
being  of  necessity  a  party  to  the  whole  wretched  business. 


BANKING    AND    COMMERCIAL    LOSSES.  217 

The  volume  of  bills  therefore  went  on  constantly  increasing;  and 
as  these  all  finally  had  their  domicile  in  London,  the  bankers  and  bill 
brokers  of  the  city,  in  spite  of  skillful  devices  kept  in  operation  to 
deceive  them,  began  to  be  suspicious,  and  to  confer  with  each  other. 
"There  are  too  many  of  these  City  of  Glasgow  Bank  bills  floating 
about,"  they  said;  and  the  general  feeling  was  that  the  volume  should 
be  curtailed.  But  none  of  the  parties  dreamed  of  the  ajjpalling  sum  to 
which  the  total  amounted. 

The  Bank  of  England,  the  great  joint  stock  banks,  and  the  discount 
houses  then  began  to  "discriminate  against"  the  bills,,  as  the  current 
London  phrase  is.  The  signs  of  constant  renewals  became  more  and 
more  evident,  and  they  refused  to  increase  the  "lines"  they  held. 

But  the  plungers  were  men  of  resource;  and  by  this  time  had  become 
utterly  unscrupulous,  both  in  what  they  said  and  what  they  did.  False 
statements  were  made  in  confidential  interviews.  Many  of  the  opera- 
tions were  transferred  to  other  financial  centres.  More  and  more  in- 
geniously contrived  batches  of  bills  were  set  afloat,  the  name  or  guaran- 
tee of  the  bank  being  attached  to  all  of  them.  And  as  it  was  known  that 
the  bank  was  on  the  principle  of  "unlimited  liability"  with  a  circle  of 
stockholders  whose  wealth  in  the  aggregate  was  immense,  the  money 
markets  of  the  world  absorbed  them.  By  such  means  the  inevitable  crisis 
was  deferred  month  after  month.  All  this  while  the  ordinary  business 
of  the  bank  at  its  numerous  branches  went  on  as  usual,  and  was  eon- 
ducted  with  the  usual  prudence  of  Scotch  banking. 

At  length,  however,  the  long-dreaded  day  arrived,  and  it  came  about 
thus. 

Some  little  time  before  the  collapse,  the  older  banks  of  Scotland  had 
been  approached  with  a  view  to  obtaining  "temporary  assistance,"  as 
is  customary  in  such  eases.  These  banks,  however,  had  for  some  time 
entertained  a  suspicion  that  something  wrong  was  transpiring,  though 
none  of  them  had  the  remotest  idea  of  its  real  character,  and  still  less 
of  its  enormous  extent. 

When,  then,  assistance  was  asked,  they  naturally  (and  as  is  custom- 
ary) stipulated  that  an  examination  of  the  condition  of  the  bank  should 
be   made. 

Before  the  examination  had  proceeded  far,  sufficient  was  revealed  to 
cause  the  older  banks  to  refuse  assistance.  This  was  the  end.  The 
Glasgow  Bank  stopped  payment  immediately.  So  did  the  circle  of 
dependent  firms.  And  very  shortly  Scotland  was  convulsed  by  the 
astounding  revelations  that  were  made  of  fraud  and  falsehood  on  a 
scale  never  before  dreamed  of.  Week  by  week  enormous  masses  of 
maturing  bills  were  protested;  and  as  the  full  extent  of  the  aff'air  began 
to  be  revealed,  London  itself  stood  aghast  at  the  masses  of  fraud  that 
its  banks  and  bill-discounters  had  been  supporting.  For  a  time  almost 
everything  emanating  from  Scotland  was  clouded  with  suspicion. 

Strong  and  solvent  firms,  and  banks  that  had  not  the  remotest  con- 


218  BANKING    AND    COMMERCE. 

nection  with  the  firms  that  had  carried  on  these  speculations,  were  sus- 
pected. It  appeared  likely,  indeed,  that  a  general  banking  panic  and 
consequent  "run"  upon  all  the  banks  would  spread  over  Scotland. 

But  the  rest  of  the  banks  met  the  situation  with  a  high  degree  of 
wisdom  and  courage.  They  determined  to  act  in  concert,  and  announced 
that  they  would  pay  the  notes  of  the  defunct  bank.  This  stopped  the 
incipient  panic.  And  as  it  came  to  be  realized  what  an  enormous  finan- 
cial strength  resulted  from  the  whole  body  of  stockholders  being  liable 
to  the  whole  extent  of  their  means,  the  public  excitement  gradually 
subsided. 

But  the  alarm  of  the  unfortunate  stockholders  went  on  increasing; 
and  when  the  report  of  the  committee  of  investigation  was  received,  an- 
nouncing that  the  whole  of  the  capital  and  the  reserve  fund  was  lost,  and 
that  the  shareholders  would  have  to  pay  in  addition  the  unheard  of  sum 
of  ieoj'SOOjOOO  sterling  to  the  creditors  of  the  bank,  an  unparalleled 
sensation  was  created,  not  in  Scotland  only,  but  tliroughout  the  banking 
world. 

The  report  of  the  committee  of  investigation  having  made  it  clear 
that  there  had  been  gross  fraud  and  misrepresentation  on  the  part  of 
the  directors,  and  certain  officials  of  the  bank,  the  Directors,  ^Manager, 
and  secretary  were  apprehended  and  brought  to  trial.  The  secretary, 
however,  was  accepted  as  a  witness,  as  his  plea  of  acting  under  con- 
straint, and  by  order  of  his  superior  officers,  was  allowed. 

The  trial  lasted  eleven  days,  and  its  revelations  were  another  illus- 
tration of  the  saying  that  "Truth  is  stranger  than  fiction."  No  romancer 
or  novelist  in  the  wildest  of  his  imaginations  could  ever  have  conceived 
such  a  series  of  events  as  that  trial  brought  forth.  They  filled  the  whole 
banking  and  commercial  world  with  excitement,  and  caused  the  expe- 
rienced men  of  the  London  money  market  almost  to  hold  up  their  hands 
in  horror  at  the  operations  to  which  they  had  unwittingly  been  parties. 

The  mercantile  failures  were  on  a  scale  of  almost  unprecedented 
magnitude  for  that  time;  the  liabilities  of  Jas.  Morton  &  Co.  being 
£2,500,000,  of  Smith,  Fleming  &  Co.,  £1,600,000,  of  Matthew  Bu- 
chanan &  Co.,  £1,310,000,  of  James  Wright  &  Co.,  £750,000,  besides 
others  of  smaller  amounts.  The  total  liabilities  of  the  circle  amounted 
to  nearly  £6,500,0001  The  assets  were  a  mere  nothing,  and  almost  the 
whole  loss  fell  upon  the  bank  and  its  unfortunate  stockholders. 

For  them,  indeed,  the  catastrophe  brought  about  misfortunes  that 
till  then  were  unparalleled.  Suicides  and  madness  ensued.  Numbers 
of  respectable  families  were  reduced  to  poverty,  and  to  such  an  extent 
did  this  prevail  that  a  public  subscription,  which  resulted  in  a  very  large 
amount  of  money  being  raised,  was  set  on  foot  for  their  relief.  Thus 
it  came  about  that  numbers  of  persons  throughout  Scotland,  who  would 
but  a  short  time  before  have  abhorred  the  idea  of  receiving  aid  from 
without,  found  themselves  compelled  by  the  pressure  of  poverty  to  accept 
the  benevolence  of  the  public. 


BANKING    AND    COMMERCIAL    LOSSES.  219 

One  very  extraordinary  contingency  happened  in  connection  with 
the  liquidation,  wliich  up  to  that  time  could  not  have  Ixen  conceived 
possible.  Tlic  Caledonian  Bank,  a  well-managed  institution  with  head- 
quarters in  Inverness,  had  taken  as  security  from  one  of  its  debtors 
four  shares  of  XlOO  each  in  the  Citj'^  of  Glasgow  Bank.  The  shares  at 
the  time  were  well  quoted,  and  considered  good  property.  The  name 
of  the  Caledonian  Bank  was  therefore  on  the  Glasgow  Bank's  register 
at  the  time  of  failure,  and  thus  this  bank  was  liable  to  the  extent  of  its 
whole  capital  for  the  Glasgow  Bank's  debts.  It  was  therefore  included 
amongst  the  "wealthy  stockholders"  who  were  expected  to  contribute 
large  sums  to  make  up  the  deficiencies  of  other  stockholders  who  were 
reduced  to  poverty.  The  knowledge  of  this  produced  great  excitement 
in  the  North  of  Scotland,  especially  amongst  the  bank's  depositors  and 
shareholders.  A  "run"  set  in.  The  bank  struggled  bravely  for  a  time, 
but  eventually  was  compelled  to  suspend  payment. 

Its  doors  remained  closed  for  some  months.  Meanwhile  a  large 
guarantee  fund  was  raised,  negotiations  for  settlement  were  entered  upon 
with  the  liquidators  of  the  bank,  and  ultimately  £11,000  was  accepted 
in  discharge  of  the  liability.  It  seems  incredible  that  this  immense  sum 
had  to  be  paid  as  the  result  of  taking  the  Glasgow  Bank's  shares  to 
secure  a  trifling  debt  of  £400.  But  so  it  was.  The  bank  resumed  busi- 
ness with  the  universal  good-will  o^  the  people  of  Scotland,  and  of  the 
other  banks,  and  has  continued  in  a  prosperous  condition  ever  since.  But 
it  had  tlie  misfortune  to  furnish  this  severe  object-lesson  of  the  danger 
of  taking  unlimited  bank  shares  as  security.  The  danger  is  not  so  great 
since  the  general  adoption  of  the  principle  of  limited  liability;  but  even 
noAv,  the  large  amount  of  uncalled  capital  general  in  English  banks 
might  be  a  cause  of  serious  loss  if  a  similar  case  arose. 

An  embarrassing  question  connected  with  the  disaster  was  the  lia- 
bility of  persons  who  were  simply  shareholders  as  trustees  or  executors. 
The  liquidators  announced  their  intention  to  hold  all  these  as  liable  in 
their  personal  estates;  a  dem.and  which  spread  consternation  over  a 
wide  circle. 

Executors  and  trustees  naturally  contended  that  the  liability  attached 
solely  to  the  assets  of  the  estates  they  administered;  a  severe  liability 
indeed  in  many  cases,  and  inflicting  untold  misery  upon  widows  and 
children  who  were  dependent  on  the  provisions  of  wills  made  in  their 
behalf.  But  that  there  should  exist,  over  and  above  this,  a  personal 
liability  of  the  trustee  himself  to  the  extent  of  his  whole  fortune,  was 
deemed  incredible.  It  seemed  utterly  inequitable.  Litigation  therefore 
ensued,  and  a  test  case  being  carried  to  the  highest  court  in  the  realm, 
the  Judicial  Committee  of  the  Privy  Council,  that  court  decided  that 
the  trustees  were  personally  liable.  The  judgment  was  considered  by 
numbers  of  people,  probably  the  majority,  as  contrary  to  reason  and 
equity,  but  the  decision  of  the  court  conveyed  by  the  Chancellor  was 
deemed  a  masterpiece  of  legal  acumen  and  subtle  reasoning.     Needless 


220  BANKING    AND    COMMERCE. 

to  say,  it  broke  with  frightful  severity  upon  numbers  of  persons  who- 
had  never  derived  benefit  from  the  stock.  By  such  severe  measures,  how- 
ever, the  whole  of  the  creditors  of  the  bank  were  ultimately  paid. 

When  things  began  to  resume  their  ordinary  course  throughout  Scot- 
land, a  profound  impression  took  possession  of  the  public  mind,  not  in 
Scotland  only,  but  wherever  the  principle  of  unlimited  liability  prevailed, 
viz.,  that  the  system  was  dangerous;  and  that  some  means  must  be  de- 
vised which  would  prevent  such  ruinous  disasters  again  overtaking  their 
stockholders.  \NTiat  was  required  was  some  statutory  limitation  of  lia- 
bility at  the  outset,  so  that  all  purchasers  and  holders  of  stock  would 
have  accurate  knowledge  of  the  worst  that  could  happen  to  them,  in  case 
of  misfortune  befalling  the  institution. 

Legislation  already  existed  in  the  Joint  Stock  Companies'  Act  by 
which  any  compam'^  could  limit  its  liability;  and  amendments  were  made 
extending  the  operation  of  the  act,  so  as  to  make  it  suitable  to  the  cir- 
cumstances of  banks. 

One  condition  of  the  legal  adoption  of  the  principle  of  limitation 
was  distasteful  in  the  extreme,  viz.,  that  any  bank  or  company  desiring 
the  benefit  of  its  provisions  nuist  add  the  word  "limited"  as  an  essential 
part  of  its  title. 

Many  banks  were  afraid  of  injury  to  their  credit  by  the  addition  of 
the  obnoxious  M^ord.  In  Scotland  this  requirement  was  felt  to  be  par- 
ticularly distasteful  to  the  majority  of  the  banks,  inasmuch  as  the  three 
oldest  institutions  of  the  country,  the  Bank  of  Scotland,  the  Royal  Bank 
of  Scotland,  and  the  British  Linen  Company,  all  claimed  that  they  were 
on  a  limited  basis  already  by  their  charters;  and  that  there  was  no  need 
for  them  to  add  the  word  to  their  title.  The  rest  of  the  Scotch  banks 
therefore,  were  particularly  averse  to  the  use  of  the  word,  as  they  con- 
sidered it  would  place  them  in  an  inferior  position  beforie  the  public. 
The  leading  London  banks,  however,  gradually  adopted  the  principle, 
enlarging  their  subscribed  capital  so  as  to  create  a  large  margin  of  un- 
called liability;  and  added  the  word  "Limited"  to  their  title.  This,  as- 
experience  has  proved,  did  them  no  harm.  Depositors  and  the  public 
were  alike  satisfied:  and,  gradually  following  their  example,  the  joint- 
stock  banks  of  England  and  Ireland  almost  all  adopted  the  principle. 

The  Scotch  banks,  who  had  at  first  stood  out,  at  length  overcame  their 
fears,  and  the  same  result  followed.  The  whole  joint-stock  banking  of 
Great  Britain  and  Ireland  is  now  therefore  conducted  on  the  principle 
of  limited  liability,  with  a  large  resene  of  uncalled  capital. 

And  from  the  failure  of  the  City  of  Glasgow  Bank,  as  well  as  that 
of  the  Western  Bank  of  Scotland  some  years  before,  all  bankers  have 
learned  that  ambilioyi,  push,  and  what  is  called  enterprise,  are  not  ele- 
ments of  good  banking.  These  two  banks  were  distinguished  by  these 
characteristics  from  the  first,  and  not  seldom  twitted  their  neighbors 
with  their  slow,  old-fashioned  methods. 

Time,  however,  and  events,  justified  them. 


CHAPTER    XXJTII. 
BANKING  AND  COMMERCIAL  LOSSES— Continued. 

A    Corner    ix    Wheat — Another    Disasthovs    Grain    Speculation — 
Advances  on  WAUEiforsE  Receipts- -Risks  of  the  Grain  Business. 

IF  experience  has  any  value,  few  narratives  can  be  more  instructive 
than  the  records  of  commercial  and  banking  losses  and  disasters 
now  being  presented.  Tliey  indeed  form  a  sort  of  chart  that  indi- 
cates the  rocks  and  shoals  besetting  navigation  in  banking  and  com- 
mercial seas.  It  is  therefore  of  high  importance  that  the  record  shall  be 
true;  and  the  selection  of  instances  such  as  to  illustrate  some  danger  to 
be  guarded  against.  The  incidents  related  in  these  and  succeeding  chap- 
ters fulfill  both  conditions. 

Some  years  .igo,  in  a  western  city  of  this  continent^  an  able  and  in- 
telligent merchant  in  the  grain  trade  was  carrying  on  business  year  after 
year  with  safety  and  satisfaction.  He  was  in  good  credit  with  hi^ 
bankers,  and  well  esteemed  on  "  'Change"  for  his  probity  and  icliability. 
He  had,  at  times,  his  losses  by  falling  markets,  but  he  had  also  his  gains; 
and,  taking  one  season  with  another,  he  made  steady  progress  and  quietly 
accumulated  capital. 

His  dealings  with  his  banker  h.ul  always  been  marked  by  probity  and 
punctuality.  He  could  be  relied  upon  to  fulfill  his  engagements,  and 
being  well  known  to  his  bankers  as  a  man  of  remarkable  intelligence,  his 
account  Mas  detmed  one  of  the  most  satisfactory  in  their  connection. 

His  operations  were  legitimate,  though  of  considerable  magnitude, 
and  so  high  was  he  esteemed  that  his  bankers  had  no  hesitation,  in  an 
active  season,  in  making  considerable  advances,  at  times,  on  his  simple 
engagement  to  deposit  equivalent  bills  of  lading  for  grain  in  the  course 
of  a  few  days,  when  the  cargoes  he  was  purchasing  would  be  completed. 

This  was  not  tlic  usual  course  of  his  account;  for  generally  the  ad- 
vances he  obtained  were  secured  at  the  time.  But  these  exceptional  ad- 
vances were  considered  to  be  needful  when  the  movement  of  grain  was 
exceptionally  heavy.  For  years  no  failure  to  meet  his  engagements  had 
occurred.  But  on  one  occasion,  in  the  midst  of  an  extremely  active  mar- 
ket, an  advance  of  this  character  was  applied  for  of  more  than  usual 
magnitude.  For  the  purpose,  ostensibly,  of  filling  contracts,  the  mer- 
chant required  to  proceed  to  Chicago  to  purchase  the  required  quantity. 
Four  or  five  days  would  have  been  sufficient  for  the  purpose,  and  by  that 
time  he  was  expected  to  return  and  deposit  the  bills  of  lading. 

But  he  failed  to  appear  at  the  expected  time.  After  a  further  delay 
of  one  or  two  days,  his  bankers  became  uneasy,  especially  on  hearing  that 
a  gigantic  "corner  in  wheat"  was  in  progress. 

221 


222  BANKING    AND    COMMERCE. 

He  had,  however,  never  been  known  to  take  part  in  anything  of  the 
kind,  and  the  uneasiness  was  not  serious. 

A  few  more  days  elapsed,  when  he  again  entered  the  bank.  His 
appearance  at  once  excited  attention.  His  face  had  a  terribly  haggard 
expression,  apparently  from  excitement  and  loss  of  sleep ;  and  a  sad  story 
he  had  to  tell.  He  had  brought  no  bills  of  lading;  he  had  lost  the  whole 
of  the  money  advanced  to  him  and  all  his  active  capital  in  addition.  In 
a  moment  of  weakness  he  had  been  induced  to  join  in  the  huge  "corner" 
that  was  in  progress,  and  to  deposit  the  money  that  had  been  advanced 
to  him,  as  his  share  in  the  operation.  For  a  day  or  two  it  seemed  as  if 
he  would  more  than  double  his  money;  but,  as  is  generally  the  case,  the 
bubble  burst  just  as  the  speculation  was  maturing.  Every  man  engaged 
in  it  was  ruined,  he  himself  included. 

He  made  all  the  reparation  in  his  power.  He  had  no  otlur  creditor 
than  his  bankers,  and  to  them  he  gave  a  mortgage  on  all  the  property 
he  possessed,  including  a  handsome  residence.  Shortly  afterwards  he 
left  the  city. 

The  fact  was,  that  lie  was  utterly  ashamed  to  meet  his  confreres  on 
'Change  after  such  a  fiasco.  And  after  realizing  their  security,  the  bank 
made  the  heaviest  loss  it  had  known  for  years. 

He  went  to  Chicago.  There  he  earned  a  precarious  subsistence  for 
about  a  year,  after  which  he  suddenly  disappeared.  None  of  his  friends 
knew  what  had  become  of  him;  but  a  few  days  afterwards  his  body  was 
found  floating  about  in  New  York  Bay — a  terrible  end  to  a  once  most 
promising  and  prosperous  career. 

Another  Disastrous  Speculation  in  Grain. 

In  another  case  in  the  same  line  of  business,  a  failure  took  place  from 
a  different  cause. 

In  a  certain  commercial  city  of  this  continent  a  innn  well  on  in  A'cars 
was  often  noticed  at  a  certain  period  in  the  last  century  as  haunting  the 
purlieus  of  'Change,  having  a  strangely  shabby,  broken-down  appear- 
ance. 

He  would  occasionally  ask  his  friends,  and  sometimes  even  his  former 
bankers,  for  a  small  loan,  telling  them,  with  an  eager  face  and  confident 
air,  that  the  market  in  some  staple  commodity  was  in  such  a  condition 
that  an  advance  was  certain.  There  was  a  handsome  profit  in  sight.  It 
was  a  sure  thing.  The  speculation  was  safe,  and  with  a  few  hundred 
dollars  at  risk,  he  had  a  certain  prospect  of  making  thousands. 

Nobody  doubted  his  truthfulness  or  honesty.  But  they  would  not 
lend  him  any  money. 

The  story  of  his  fall  from  a  higher  position  in  the  business  world  is 
an  instructive  one.  The  circumstances  passed  under  my  own  observation; 
as  did  those  just  related. 

In  the  year  18 —  an  extraordinary  rise  took  place  in  a  leading  staple 
of  the  Canadian  grain  trade.     This  person  had  been  engaged  many  years 


BANKING    AND    COMMERCIAL    LOSSES.  22S 

in  that  special  branch,  and  had  met  with  fair  success.  He  understood 
the  business,  liad  good  connections,  liad  some  capital,  and  always  main- 
tained an  honorable  record. 

In  this  particular  year  he  commenced  buying  the  grain  referred  to 
in  the  customar\  manner,  and  continued  for  some  time  shipping  as  well 
as  buying,  taking  but  small  risks,  as  was  his  usual  method.  As  the  price 
was  steadily  advancing,  he  uniformly  realized  a  profit  out  of  his  pur- 
chases. Naturally,  this  developed  a  disposition  to  make  larger  pur- 
chases, and  also  to  hold,  which  at  length  he  determined  to  do,  warehous- 
ing the  grain  in  independent  warehouses  and  obtaining  advances  thereon 
from  his  bankers.  He  M'as  advised  by  them  from  time  to  time  to  ship 
and  realize  his  profits,  which  were  becoming  considerable.  But  the  mar- 
ket went  on  rapidly  rising.  A  heavy  speculation  set  in.  Buying  orders 
from  abroad  poured  into  the  offices  of  dealers,  and  the  price  at  length 
reached  a  phenomenal  figure,  such  as  was  never  known  for  the  article 
either  before  or  since. 

Exciting  scenes  occurred  daily  on  'Change,  and  a  perfect  fever  of 
speculation  prevailed. 

His  bankers  now  pressed  more  and  more  strongly  that  he  should  real- 
ize and  take  advantage  of  what  was  the  opportunity  of  a  lifetime,  by 
realizing  a  profit  which  would  nearly  double  his  capital. 

He  was  wise  enough  to  adopt  their  suggestion,  and  on  one  wcll- 
remembf  red  day,  sold  out  his  whole  stock  at  an  immense  profit. 

His  bankers  congratulated  him  that  afternoon  on  the  sale,  for  it  not 
only  ensured  repayment  of  their  advances,  but  the  prospect  of  a  good 
and  safe  business  with  him  in  the  future  from  his  largely  increased  capi- 
tal. 

The  day  on  which  he  made  the  sale  was  a  day  of  excitement  far  be- 
yond anything  ever  known  in  the  trade.  The  air  was  full  of  rumors, 
dealers  were  buoyant  bej'ond  all  reason,  and  the  price  went  on  advancing, 
on  this  one  day,  by  "leaps  and  bounds."  The  bank  congratulated  itself 
that  their  customer  at  any  rate  had  escaped  from  the  vortex ;  and  when  he 
made  his  appearance  next  morning,  supposed  he  would  hand  in  checks 
for  his  advances,  with  the  large  profit  he  had  realized  in  addition. 

Conceive,  then,  the  disappointment  and  vexation,  indeed  the  anger 
of  the  bank,  on  learning  that  after  selling  out  his  stock,  and  realizing 
practically  a  fortune,  he  had,  in  market  phrase,  "bought  in  again,"  and 
was  now  holding  as  much  of  the  grain  as  ever !  After  getting  safely  out 
of  the  vortex,  he  had  been  caught  by  the  spirit  of  speculation  then  domi- 
nating the  market,  and  plunged  in  again. 

The  indignant  remonstrances  of  his  bankers  produced  no  effect.  He 
was  convinced  that  the  market  would  rise  still  higher;  that  he  would 
make  a  still  larger  profit,  and  was  deaf  to  all  advice  and  warning. 

It  was,  however,  at  that  moment,  more  his  affair  than  the  bank's;  for 
its  margin  was  very  large,  and  the  market  would  have  to  fall  to  what 
seemed  an  impossible  extent,  before  they  could  be  affected. 


i?21  BANKING    AND    COMMERCE. 

What  followed  may  be  briefly  told. 

FroDa  that  day  the  market  began  to  decline.  The  decline  went  on 
steadily.  He  persuaded  himself,  however,  that  there  would  soon  be  a 
reaction,  and  that  the  price  would  go  higher  than  ever.  Nothing  could 
shake  that  conviction. 

The  decline  proceeded  as  rapid)}-  as  the  rise  had  done,  but  he  could 
not  be  persuaded  to  sell. 

The  bank  could  not  reasonably  exercise  the  "power  to  sell"  contained 
in  their  securities,  so  long  as  the  margin  continued  so  good.  Therefore 
week  by  week  he  was  allowed  to  take  his  own  course.  But,  as  is  often 
the  case  under  such  circumstances,  he  became  utterly  demoralized  bv  the 
rapid  disappearance  of  his  profits.  He  continued  desperately  to  hope 
against  hope;  until  at  last  the  bank,  seeing  that  the  margin  was  rapidly 
disappearing,  gave  the  usual  notice,  took  jDOSsession  of  the  grain,  placed 
it  on  the  market,  and  realized. 

The  market  fell  steadily  and  rapidly  during  the  process;  and  the 
final  result  was  that  the  net  amount  realized  from  the  grain  was  actually 
less  than  the  advances  on  it. 

The  man  was  ruined  beyond  redemption.  The  bank's  loss  was  con- 
siderable, but  for  the  merchant  the  event  was  fatal. 

From  that  time  he  never  held  up  his  head.  He  became  utterly  unfit 
for  business,  disappeared  from  the  scene  of  his  misfortune,  and  finally 
subsided  into  a  melancholy  wreck,  a  terrible  example  of  the  folly  of 
eagerly  grasping  at  the  last  dollar  of  profit,  and  so,  according  to  the  old 
fable,  by  aiming  at  a  shadow,  losing  the  substance. 

The  grain  trade,  perhaps  more  than  any  other,  requires  a  particularly 
cool  head,  and  what  may  be  called  a  moderation  of  spirit,  to  enable  suc- 
cess to  be  achieved  in  it.  In  almost  every  considerable  centre  of  this 
branch  of  commerce  are  to  be  found  such  wrecks  as  the  foregoing;  and 
it  may  be  laid  down  almost  as  an  axiom  in  this  business  that  the  man  who 
seeks  to  make  large  profits  out  of  a  single  venture  will  inevitably  be 
overtaken  at  some  time  in  his  career  with  bankruptcy  and  ruin. 

One  of  the  most  successful  men  who  ever  carried  on  this  business  in- 
variably acted  on  the  principle  of  never  grasping  at  the  last  percentage 
of  profit  in  a  given  line  of  operations,  and  continued  to  the  day  when  he 
went  out  of  the  trade  altogether,  a  prosperous  and  successful  man. 

Another  example  of  commercial  and  banking  loss  in  this  exciting  but 
difficult  trade  differs  from  both  the  preceding. 

At  a  certain  point  in  the  nineteenth  century  no  name  was  more  promi- 
nently known,  both  on  this  side  the  Atlantic  and  in  Europe,  than  that  of 
a  large  grain  merchant  in  a  certain  much-frequented  seaport.  His  op- 
erations were  legitimate,  in  one  sense,  namely,  that,  unlike  speculators 
on  margin,  he  handled  the  actual  grain,  purchasing  and  shipping  from 
western  centres  of  production  to  merchants  and  millers  in  Europe.  His 
operations,  at  times,  were  so  large  that  he  could  furnish  the  whole  cargo 


BAXKIXG    AND    COMMERCIAL    LOSSES.  225 

of  several  steamers  at  once.  Many  merchants  and  millers  in  Europe 
looked  to  hira  for  supplies.  Inland  steamers  were  supplied  by  him  with 
a  constant  succession  of  cargoes  during  navigation.  Cables  and  tele- 
grams alike  were  pouring  into  his  offices  continually,  and  his  bank  ac- 
count was  one  of  phenomenal  activity.  His  capital  was  supposed  to  be 
large;  but  his  operations  altogether  baffled  the  calculations  of  more  mod- 
erate men  in  the  trade.  They  despaired  of  following  out  the  results;  but 
amongst  themselves  had  shrewd  suspicions  that,  at  some  time  or  other,  a 
heavy  collapse  would  ensue.  And  ensue  it  did.  It  came  about  in  this 
wise. 

In  the  midst  of  a  certain  season,  known  to  be  one  of  heavy  depression 
in  the  trade,  his  bankers  demanded  a  more  exact  statement  of  the  stores 
of  grain  he  held,  and  the  cargoes  he  had  under  way,  as  well  as  the  state 
of  his  account  with  European  correspondents. 

On  this  statement  being  examined,  it  became  evident  that  he  was 
insolvent. 

The  advances  from  his  bankers  were  nominally  covered  by  securities, 
but  investigation  showed  that,  in  many  cases,  the  so-called  securities  were 
of  an  illusory  character 

Large  quantities  of  grain,  represented  as  being  stored  in  a  certain 
mill,  or  in  process  of  shipment,  were  not  to  be  found. 

Properties  in  the  shape  of  mills,  ships,  etc.,  were  found  to  be  worth 
a  mere  fraction  of  the  values  he  had  placed  upon  them. 

When  he  had  passed  into  insolvency,  and  a  thorough  investigation  of 
his  affairs  was  made  by  a  committee  of  creditors,  it  became  evident  that 
his  business  for  years  had  been  nothing  more  than  a  continued  course  of 
heavy  "plunging."  He  had  gone  on  recklessly  making  immense  pur- 
chases, and  shipping  a  large  series  of  cargoes  across  the  Atlantic  on 
consignment,  conducting  his  whole  business  as  if  it  were  a  game  of 
chance.  The  only  difference  between  his  operations  and  those  of  a  mere 
speculator  on  margin  was  that  he  actually  handled  the  grain. 

Fortune  sometimes  favored  him;  for  his  books  showed  that  at  the 
close  of  some  seasons,  he  had  a  large  surplus  of  capital.  But  more  fre- 
quently he  closed  the  year  in  a  state  of  insolvency. 

How,  then,  it  may  be  asked,  did  he  keep  himself  afloat? 
The  answer  is  to  be  found  in  the  condition  of  his  affairs  at  the  close, 
viz.,  that  there  were  in  the  hands  of  his  banker  documents  representing 
large  quantities  of  grain  that  had  passed  out  of  existence,  on  which  he 
had  obtained  advances,  l)iit  which  had  been  shipped  without  such  advances 
being  retired,  a  state  of  things  which  every  banker  doing  business  in 
seaport  centres  knows  to  be  possible  when  numbers  of  cargoes  are  con- 
stantly shipped. 

The  business  was  wound  up.  The  estate  paid  scarcely  any  dividend 
And  as  in  the  former  cases,  the  great  speculator  disappeared  from  the 
scene  of  his  ambitious  projects  and  never  returned. 


226  BANKING    AND    COMMERCE. 

Advances  on  Warehouse  Receipts. 

It  may  be  said  that  the  feature  of  Canadian  law  which  makes  it 
legal  for  bankers  to  advance  money  on  warehouse  receipts  given  by  a 
person  for  his  own  property  is  responsible  for  such  disasters  as  the  fore- 
going. 

There  can  be  no  doubt  that  such  receipts  are  of  far  less  value  as 
security  than  those  given  by  a  warehouseman  for  goods  placed  in  his 
charge  by  another.  But  no  banker  is  obliged  to  make  advances  on  such 
documents^  and  it  is  doubtful  whether  in  this  case  advances  were  made  on 
this  kind  of  a  warehouse  receipt  at  the  outset. 

It  is  more  than  likely  that  the  shortage,  so  to  speak,  arose  in  the 
processes  by  which  grain  is  transferred  from  railway  to  steamer,  from 
canal  boats  to  warehouse,  from  inland  steamers  to  ocean-going  vessels,  in 
all  which  operations  there  are  intervals  of  time  during  which  merchandise 
is  in  a  state  of  transition,  and  actuallj'  covered  by  neither  one  kind  of 
document  nor  another.  The  amount  of  grain  in  transition  when  opera- 
tions are  large,  in  an  active  shipping  season,  is  of  far  greater  magnitude 
than  any  outsider  would  deem  possible. 

Risks  of  the  Grain  Business. 

The  commercial  and  banking  losses  mentioned  in  this  chapter  all  arose 
in  connection  with  one  line  of  business,  viz.,  the  export  grain  trade;  and 
all  experience  shows  this  business  to  be  one  of  the  most  risky  in  which 
any  man  can  engage.  Yet  it  is  one  of  the  most  useful  of  all  occupations, 
for  the  supply  of  food  to  the  people  of  whole  nations  depends  upon  it. 

If  such  a  thing  could  be  conceived  as  that  commercial  men  would  be 
so  afraid  of  the  risks  of  the  trade  that  they  would  not  engage  in  it,  a 
good  part  of  the  people  of  the  world  would  starve.  That,  however,  is 
inconceivable.  But  it  is  a  fact  that  the  average  rate  of  profit  in  the  busi- 
ness of  providing  the  staple  food  of  mankind  is  so  small  that  nothing 
but  the  closest  calculation  and  most  exact  management,  combined  with 
coolness  of  judgment,  can  carry  a  man  successfully  through  its  risks. 

In  looking  over  the  results  of  hundreds  of  millions  of  operations 
engaged  in  by  exporters  and  dealers  in  breadstuff s  throughout  the  world, 
it  is  somewhat  melancholy  to  notice  how  few  of  the  men  who  have  beer 
engaged  in  the  trade  have  derived  any  permanent  benefit  from  it.  Bene- 
fit there  has  been  to  the  great  mass  of  consumers,  but  the  result  to  the 
men  who  have  fed  these  millions  has  almost  invariably  been  bankruptcy. 

In  examining  dispassionately  cases  like  the  foregoing,  and  endeavor- 
ing to  draw  some  useful  lessons  therefrom,  both  for  bankers  and  their 
customers,  it  is  impossible  to  avoid  a  conviction  that  some  blame  must 
fall  upon  the  banks  concerned. 

Let  them  be  taken  one  by  one.  The  bank  in  the  first  case  advanced  a 
very  large  sum  in  actual  money  on  the  statement  of  a  customer  that  he 
was  about  to  make  large  purchases  in  a  distant  grain  centre.  But  with 
such  knowledge  of  business  as  bankers  ought  to  possess,  and  the  exercise 


BANKING    AND    COMMKIU  lAL    LOSSES.  227 

of  shrewd  rcHection,  they  sl)ould  have  seen  that  it  was  not  necessary  for 
a  customer  to  go  to  that  market  with  money  actually  in  hand.  There  was 
no  need  for  the  bank  to  hand  their  customer  this  money ;  and  the  fact  that 
they  were  asked  to  do  it  should  have  rendered  them  suspicious.  The 
proper  course  for  the  merchant  would  have  been  to  go  to  Chicago,  to  pur- 
chase the  required  quantitj'^,  to  order  it  to  be  shipped;  and  for  the  seller 
to  draw  upon  him  at  short  sight  with  bills  of  lading  attached.  The 
bank  could  have  advanced  the  money  to  take  up  the  drafts  with  safety; 
for  they  would  have  the  bills  of  lading  as  security.  This  would  have 
demonstrated  to  the  bank  that  their  money  was  represented  by  grain; 
but  to  ask  for  a  large  amount  of  money  for  the  purpose  of  taking  it  to 
Chicago  should  have  suggested  that  an  improper  use  might  be  made  of 
it.  They  should  have  known  that  it  might  be  put  up  as  a  margin  in  a 
speculation,  or  paid  in  as  a  share  in  a  huge  "corner;"  which  last  proved 
actually  to  be  the  case,  to  the  ruin  of  the  merchant  and  loss  to  the  bank. 
In  the  second  case,  where  a  bank's  customer  refused  to  sell  grain  on 
a  falling  market,  while  there  was  still  a  heavy  profit  in  the  transaction, 
it  is  evident  that  the  power  of  sale  should  have  been  exercised  earlier 
than  it  was. 

The  case  was  one  for  prompt  and  decisive  action,  when  the  bank  had 
so  foolish  a  customer  to  deal  with.  No  considerations  of  regard  for  a 
man's  feelings,  or  fear  of  giving  offence,  should  have  been  allowed  to 
prevail  at  such  a  time.  Even  a  regard  for  the  customer's  own  interest 
might  have  led  the  bank  to  a  firm  course  of  action;  for  imdoubtedly  a 
customer's  interest  is,  at  times,  best  served  by  a  refusal  to  lend  money, 
or  by  insisting  upon  payment  at  the  proper  time. 

After  all,  what  the  bank  was  bound  to  consider  was  its  own  interest; 
and  if  it  had  followed  a  course  of  action  best  suited  to  that,  it  would 
have  saved  itself  from  loss,  and  its  customer  from  ruin. 

In  the  third  case,  the  bank  was  to  blame  in  making  continuous  ad- 
vances to  a  customer  whose  operations  repeatedly  suggested  the  necessity 
of  a  close  inquiry  as  to  his  methods  and  position,  which  inquiry  would 
have  demonstrated  that  his  methods  were  unsound,  and  his  operations 
nothing  but  "plunging."  In  tliis  case  the  bank  should  have  insisted  upon 
tangible  and  -solid  security  to  be  furnished,  so  that  its  advances  might 
at  all  times  be  covered,  in  default  of  which  it  should  have  closed  the 
accoimt;  and  no  consideration  of  the  convenience  of  the  customer,  or  the 
indirect  advantage  to  trade,  or  the  profitableness  of  the  apparently  valu- 
able account,  should  have  prevented  such  action  being  taken. 

The  above  criticism  is  all  founded  on  the  theory  that  a  banker  should 
be  sufficiently  acquainted  with  the  general  course  of  the  trade  of  his 
customers  to  be  able  to  judge  whether  they  are  carrying  on  business 
judiciously  or  not.  That  this  is  a  sound  theory  will  hardly  be  disputed 
by  those  competent  to  pass  judgment. 


CHAPTER    XXIX. 

LOSSES  IN  CONNECTION  WITH  THE  IMPORTING  TRADE  AND 
OTHER  LINES  OF  BUSINESS. 

How  A  Bank  Lost  Through  Taimtke  of  an  Importing  Hotse — 
Benevolence  Not  an  Attribute  of  Banking — A  Remarkable 
Failure — ^The  Lumber  and  TiMTiER  Trade. 

IN  the  preceding  chapter  instances  have  been  given  of  losses  arising 
out  of  one  branch  of  our  export  trade,  viz.,  that  in  grain.  In  the 
present  chapter  the  subject  of  losses  in  other  lines  of  business  will 
be  considered. 

There  is  a  radical  difference  between  the  modes  of  operation  in  these 
lines  of  business  and  those  in  the  grain  trade.  The  latter  deals  with  the 
prime  necessity  of  human  life.  Quotations  of  its  value  are  made  every 
day  in  tlie  commercial  centres  of  the  world.  Its  operations  are  carried 
on  and  reviewed  in  the  produce  exchanges  of  commercial  cities;  the  re- 
sults are  public  property,  and  as  the  trade  is  in  staples  of  absolute 
necessity,  transactions  are  large  and  the  percentage  of  profit  small.  But 
the  importing  trade  of  tliis  continent  deals  with  a  multitude  of  articles 
of  which  the  values  are  never  publicly  quoted,  and  the  dealing  in  which 
requires  special  education  and  experience. 

Moreover,  the  business  of  importing,  and  tlie  wholesale  dealing  in 
imported  goods,  can  scarceh^  be  entered  upon  without  more  or  less  capi- 
tal and  business  knowledge.  Its  results,  taken  broadly  and  generally 
have  been  much  more  satisfactory  to  those  who  have  carried  it  on. 

Yet  it  cannot  be  denied  that  in  many  instances,  from  various  causes, 
many  a  career  that  at  one  time  looked  promising  has  ended  in  disaster 
and  bankruptcy,  entailing  at  times  heavy  losses  both  to  banks  and  to 
other  traders.    Let  us  take  one  or  two  examples  of  this  on  this  continent. 

In  the  earlier  days  of  Canada  a  large  house  in  the  importing  trade 
had  risen  in  a  commercial  centre  from  comparatively  small  beginnings 
until  its  operations  extended  over  a  vast  extent  of  territory  and  popula- 
tion. Tlie  firm  had  acquired  high  credit.  It  could  buy  at  the  best  termi 
in  foreign  markets,  and  its  selection  of  goods  was  such  as  to  attract 
customers  from  all  parts  of  the  country.  It  thus  gradually  came  to  have 
almost  a  monopoly  of  the  business  of  many  storekeepers  in  country 
towns,  who  found  the  firm  most  accommodating  in  their  mode  of  doing 
business;  giving  credit  liberally,  being  lenient  in  collecting,  and  always 
ready  to  consider  favorably  proposals  for  renewing  bills  or  extending 
credit  if  satisfactory  security  was  given. 

Naturally,  under  these  circumstances,  the  house  came  to  have  a  num- 
ber of  customers  who  leaned  u])on  it  for  supplies  and  were  of  that  profit- 

228 


LOSSES    JN    OTIIKH    TJNES    OF    BUSINESS.  2^29 

able  kind  who  never  objected  to  prices.  Their  customers  in  many  cases 
gave  security  to  the  house  on  land  and  buildings,  the  land  being  often 
uncleared  lots  in  tlie  forest,  or  the  partially  cleared  farms  of  struggling 
settlers.  The  properties  in  many  cases  had  already  been  mortgaged  for 
loans  or  unpaid  purchase  money,  but  the  house  took  the  security  for 
what  it  was  worth;  generally  under  the  impression,  common  in  those 
early  days,  that  real  property  was  sure  to  advance  in  value.  The  security 
would  thus  become  more  tangible  year  by  year. 

Under  this  condition  of  things,  the  amounts  owing  by  the  circle  of 
dependents,  for  such  they  were,  tended  continually  to  increase;  until  in 
many  cases  it  became  an  absolute  necessity  to  carry  the  account  on,  un- 
less the  customers  were  allowed  to  go  on  into  insolvency.  When  men  in 
the  retail  trade  arrive  at  this -stage,  they  cannot  get  credit  elsewhere; 
they  must  be  carried  on  or  stop. 

The  ordinary  bank  account  of  a  firm  in  their  line  of  business  would 
consist  of  the  discounting  of  customers'  bills  given  in  payment  of  goods, 
and  purporting  to  be  payable  on  an  expressed  day. 

So  long  as  these  bills  represented  goods  in  the  active  course  of  buy- 
ing and  selling;  representing,  that  is  to  say,  a  moving  account,  tluir  pay- 
ment with  perhaps  one  renewal  could  be  depended  upon.  With  many  of 
the  smaller  customers  of  the  house  this  continued  to  be  the  case.  But 
with  regard  to  the  class  of  customers  before  named  (which  was  an  in- 
creasing one)  their  bills  came  to  represent  more  and  more  mere  dead  stock 
on  the  shelves,  and  were  kept  current  by  renewals.  Especially  was  this 
the  case  with  that  portion  of  their  debt  for  which  security  had  been  given. 

Thus,  then,  their  banking  accounts  (for  they  ultimately  had  three) 
would  present  this  appearance:  that,  while  it  contained  the  paper  of  a 
large  number  of  persons  for  small  amounts  representing  active  business, 
it  also  contained  the  bills  of  a  certain  number  of  persons  for  far  larger 
amounts,  representing  what  are  known  as  "supply  accounts,"  on  mere 
dead  stock. 

It  has  been  said  that  both  the  number  of  this  class  of  accounts  and 
the  sums  due  by  each  went  on  steadily  increasing;  for  the  method  of  the 
house  naturally  led  to  their  ordinary  customers  drifting  into  this  undesira- 
ble class.  So  long  as  the  prosperous  times  lasted,  while  mo:uy  was 
plentiful,  and  the  credit  of  the  firm  good,  the  account  being  large,  active 
and  profitable,  the  several  bankers  of  the  firm  allowed  this  state  of  things 
to  continue.  But  at  length  the  usual  turn  in  the  tide  took  place.  Bad 
harvests  made  money  tight.  A  great  tide  of  revulsion  set  in,  necessitat- 
ing severe  curtailment  of  discounts  by  banks.  The  firm  was  called  upon 
for  considerable  reductions  by  each  of  its  -ba^ikers,  while  the  creditors 
of  the  house  in  Europe  and  elsewhere,  being  advised  of  the  unfavorable 
turn  of  affairs  on  this  side  of  the  Atlantic,  also  called  for  closer  jiaymcnt 
of  invoices.  The  firm  was  thus  pressed  from  two  sides  at  once,  and  was 
under  the  necessity  of  taking  strenuous  measures  with  its  customers  in 
turn,  insisting  upon  their  accounts  being  reduced,  or  paid  up.     But  reduc- 


230  BANKING    AND    COMMERCE. 

tion  in  times  of  monetary  pressure  is  almost  impossible,  as  Mr.  Gilbart 
has  shown  in  his  admirable  work  on  banking.  The  retailers  endeavored 
tci  collect  in  turn  from  their  customers,  and  a  general  condition  of  dis- 
turbance ensued.  Some  asked  extensions,  offering  such  security  as  they 
had.  Others  went  into  insolvency.  The  selling  off  their  stocks  by  an 
assignee  tended  to  embarrass  other  firms,  and  thus  things  went  on  drift 
ing  from  bad  to  worse.  Before  this  had  occurred,  the  banks  had  scruti 
nized  the  bills  given  by  the  firm  with  unusual  care,  and  realized  that  the 
amount  of  paper  given  by  certain  customers  was  far  beyond  what  was 
legitimate."^ 

Thus  when  the  bankers  of  the  firm,  in  the  sharp  stress  of  monetary 
pressure,  came  to  sit  in  judgment  upon  the  bills  current  in  the  account, 
they  w-ere  vexed  beyond  measure  to  find  what  large  amounts  of  the  paper 
of  certain  storekeepers  were  afloat.  Men  whose  whole  sales  in  a  year 
were  only  some  $50,000  had  bills  running  for  the  whole  of  that  sum  o- 
even  more. 

A  scrutiny  of  the  securities  was  quite  as  unsatisfactory.  Numbers 
of  mortgages  supposed  to  be  on  cultivated  farms,  with  buildings  and 
orchards,  were  found  to  be  on  lands  only  partially  cleared  with  nothing 
but  a  shanty,  or  log  barns  on  them,  and  the  land  itself  not  wholly  paid 
for.  Under  these  circumstances  the  firm  went  into  insolvency.  As  the 
realization  of  the  assets  went  on,  the  land  often  turned  out  to  be  barely 
worth  the  first  mortgage,  making  the  bank's  security  worthless.  Mort- 
gages on  property  in  villages  or  towns  were  in  many  cases  equally  de- 
lusive. Vacant  lots,  valued  at  high  prices  under  some  "boom"  influence, 
wooden  buildings,  shops,  dwellings  or  barns,  when  brought  to  sale  after 
foreclosure,  realized,  when  charges  were  paid,  but  a  mere  fraction  of  the 
nominal  value  of  the  mortgage. 

Whilst  these  processes  were  advancing  the  revulsion  in  the  commercial 
sphere  that  had  set  in  went  on  deepening  year  by  year.  Abundant  har- 
vests, sold  at  high  prices,  which  had  much  to  do  with  the  development  of 
the  boom,  were  succeeded  by  a  succession  of  bad  years.  Hence  a  heavy 
fall  in  the  value  of  properties,  and  a  continued  series  of  commercial 
failures  both  in  the  wholesale  and  retail  trades.  The  terrible  experiences 
of  the  United  States  in  1857  were  repeated  all  over  Upper  Canada.  As 
might  naturally  be  expected  nearly  the  whole  of  these  dependent  persons 
failed  when  the  supply  house  failed,  and  their  estates  yielded  very  mod 
erate  dividends. 

This,  of  course,  reacted  upon  the  dividend  paid  by  the  great  firn. 
itself.  Upon  the  various  bankers  of  the  firm  finally  fell  the  task  ol 
dealing  with  and  winding  up  these  complicated  estates.     This  was  a  mat- 

71  T.i't  it  not  surprise  the  reader  that  this  had  not  heen  done  before.  Bankers, 
like  other  mortals,  are  affected  by  changing  circumstances.  In  prosperous  times, 
when  business  is  swinging  along  with  activity,  a  banker's  judgment  is  apt  to  be 
affected.  An  amount  that  would  look  dangerous  when  money  is  scarce,  is  passed 
by  almost  without  notice  when  money  Is  pl.-ntiful.  And  the  course  of  an  account 
which  In  times  of  pressure  is  seen  to  be  Illegitimate,  in  times  of  prosperity  i« 
apt    to  be   passed    by   unnoticed. 


LOSSES    IX    OTHER    LINES    OF    BUSINESS.  231 

tcr  of  years,  and  the  final  result  was  heavy  loss.  As  to  the  firm  itself, 
it  passed  out  of  existence.  Its  various  members  became  scattered  here 
and  there.  Some  of  their  old  employees  picked  up  the  scattered  debris 
of  the  once  widespread  business,  and  met  with  various  degrees  of  success ; 
but  the  firm  itself,  once  so  prominent  and  powerful,  has  almost  passed 
out  of  the  memory  of  the  old  inhabitants  of  the  city  where  the  name  of 
the  firm  once  commanded  such  high  respect. 

The  above  is  a  typical  instance  of  the  kind  of  failures  that  occurred 
in  the  early  days  of  Canadian  development,  when  the  country  was  only 
half  cleared,  the  real  value  of  land  very  unsettled,  and  few  means  exist- 
ing of  ascertaining  the  true  position  of  retail  merchants;  and  also  when 
the  true  principles  on  which  credit  should  be  given  were  as  yet  imper- 
fectly understood. 

It  is  true  that  even  in  this  condition  of  things,  some  mercantile 
houses  managed  to  thread  their  way  by  dint  of  more  than  ordinary  saga- 
city and  prudence,  combined  with  courage  in  stopping  when  things  looked 
dangerous.  Such  men,  in  various  instances,  accumulated  a  competency 
or  fortune,  which,  with  the  business  they  founded,  has  survived  to  this 
day.  But  the  above  history  is  only  too  true  a  record  of  an  opposite 
kind,  of  which  Canada  in  its  early  days  furnished  many  unfortunate 
examples. 

Of  an  entirely  different  description  in  most  of  its  particulars,  though 
like  it  in  its  general  features,  was  a  failure  that  occurred  in  a  later  period 
of  deep  depression  in  one  of  the  commercial  centres  of  this  continent. 
The  head  of  the  house  was  a  man  who  had  been  well  trained  to  business, 
and  thoroughly  understood  it  in  all  its  departments.  A  man  of  activity 
and  energy  also,  of  an  enterprising  disposition,  he  had  built  up  a  larg-.' 
business  from  small  beginnings,  until  he  stood  in  the  front  rank  of  the 
houses  in  his  own  line  of  trade.  His  capital,  apparently,  had  been 
steadily  growing  until  it  amounted,  as  was  supposed,  to  a  very  large  sum. 
And  so  he  supposed  himself.  He  was  a  man  of  philanthropic  tempera- 
ment, loved  to  help  men  on  in  life,  especially  young  men;  and  had  sel 
up  in  business  a  number  of  such  in  various  parts  of  the  country,  whu, 
of  course  bought  goods  from  his  firm  exclusively.  As  has  been  sho^vn 
in  another  part  of  this  treatise,  this  mode  of  doing  business  has,  for  a 
time,  great  attractions  on  both  sides.  To  the  merchant  it  gives  an  outlet 
to  his  goods  at  all  times  with  the  least  trouble  and  expense,  and  at  a 
better  than  average  profit.  To  the  retailer  it  affords  an  unfailing  source 
of  supply  of  goods  for  his  shelves,  and  almost  certain  help  when  money 
is  scarce  and  times  difficult. 

Benevolf.xce   Not  an  Attribute  of  Banking. 

Benevolence  is  a  fine  attribute  of  character  in  the  ordinary  walks  of 

life;  but  a  competent  authority  has  declared  it  to  be  dangerous  and  out 

of  place  when  projected  into  the  sphere  of  banking.      It  is  equally   so 

in  the  sphere  of  commerce;  for  it  renders  it  difficult  for  a  merchant  tt' 


232  BANKING    AND    COMMERCE. 

resist  importunities  cither  for  more  time,  or  more  goods,  and  it  prevents 
him  from  employing  those  measures  of  enforcement  which  are  at  times 
absolutely  necessary  to  the  safety  of  business. 

Hardly  ever  was  there  a  better  exemplification  of  this  than  in  the 
case  before  us.  The  accounts  of  these  men  who  had  been  so  set  up 
went  on  smoothly  when  times  were  prosperous;  the  only  disquieting 
circumstances  being  that  they  tended  to  grow  larger  and  larger.  This 
tendency  should  have  been  strenuously  repressed,  and  the  accounts  kept 
witliin  proper   bounds. 

But  unfortunately  for  this  merchant,  he  was  in  such  good  credit, 
that,  as  it  was  in  the  case  just  cited,  he  could  discount  bills  freely  in 
three  banks  simultaneously.  This  facility  of  obtaining  money  blinded 
him  to  the  danger  of  such  overgrown  credits.  And  the  fact  that  the 
account  was  carried  on  in  three  places  blinded  the  eyes  of  his  bankers 
too.  None  of  them,  in  looking  over  the  discounts  under  his  name,  seemed 
to  have  realized  the  true  position.  Their  own  share  of  the  bills  of  these 
supph'  concerns  did  not  seem  to  be  large  enough  to  create  uneasiness. 
None  of  them,  apparently,  took  account  of  the  fact  that  the  paper  under 
each  name  required  to  be  multiplied  by  three.  Had  they  done  this,  they 
could  not  fail  to  have  seen  how  dangerous  the  position  was.  Had  there 
been  only  one  account  M'ith  a  well  managed  bank,  it  would  have  been 
impossible  for  such  a  state  of  things  to  have  arisen.  No  single  bank 
would  have  discounted  such  an  amount  of  the  bills  of  these  houses,  or  any 
of  them,  as  was  discovered  to  have  been  distributed  amongst  the  three 
The  tendency  to  overgrown  credits  would  have  been  checked  by  refusal 
to  discount.  But  facility  of  discounting  proved  the  merchant's  ruin. 
A  time  of  depression  at  length  set  in.  Trade  became  bad,  money  scarce, 
collections  difficult.  Payments  on  the  bills  of  these  houses  became  less 
and  less,  and  pressure  for  renewals  more  and  more.  Even  then  the 
house  might  have  been  saved  bj'  energetic  treatment  being  applied  to 
these  customers,  and  payments  insisted  upon  before  delivery  of  new 
goods.  But  the  head  of  the  firm  had  not  the  heart  to  do  this.  He  found 
it  impossible  to  resist  importunity.  Matters  drifted  on  until  the  ac- 
counts due  by  these  parties  and  the  paper  discounted  at  the  three  banks 
rose  up  to  sums  which,  as  owing  by  retailers,  were  simply  appulling. 
Had  these  customers  owed  him  but  five  to  ten  thousand  dollars,  he  might 
have  been  able  to  take  them  in  hand,  and  would  not  have  been  afraid 
even  of  their  stopping  payment.  But  as  it  was,  their  accounts  had  run 
up  to  sums  of  thirty,  forty,  and  fifty  thousand;  and  even  in  one  case 
to  such  an  abnormal  figure  as  one  hundred  and  twenty  thousand !  Their 
aggregate  indebtedness  was  far  more  than  the  whole  capital  of  the 
house.  To  stop  them  meant  ruin.  Matters  therefore  drifted  on,  always 
with  the  same  delusive  hope  of  a  turn  in  the  tide  which  would  render 
quiet  liquidation  of  some  of  these  concerns  possible.  But  depression 
went  on  dee])ening,  and  banks  as  well  as  merchants  felt  the  pressure  of 
it.     They  were  comjielled  to  curtail  their  discounts.      The  three  banks 


LOSSES    IN    OTHER    LINES    OF    BUSINESS.  233 

concerned  all  applied  pressure,  but  there  was  no  effectual  response. 
There  could  not  be;  and  finally,  the  firm,  overborne  by  the  weight  of 
these  masses  of  money  due  to  them,  that  would  take  years  to  collect, 
stopped  payment,  placed  their  affairs  in  the  hands  of  an  assignee,  and 
were  compelled  to  compromise  with  the  same  creditors  who  had  been 
assured,  only  a  year  or  two  before,  that  the  house  had  a  capital  of 
hundreds  of  thousands   of  dollars. 

In  this  case  the  primary  cause  of  failure  was  in  allowing  a  strong 
instinct  of  benevolence  to  be  carried  into  a  sphere  in  which  it  had  no 
place.     The  secondary  cause  was  the  facility  of  obtaining  discoimts. 

There  is  this  further  to  be  said,  that  if  the  party  had  had  to  deal 
with  only  one  banker  and  could  have  shown  himself  solvent,  effectual 
help  would  have  been  rendered  him  when  difficult  times  supervened. 
But  co-operation  between  three  was  impossible. 

A  Remarkable  Failure. 

We  will  now  pass  on  to  a  failure  in  another  line  of  business,  and 
distinguished  by  more  remarkable  features  still. 

In  a  certain  town  of  Canada  there  lived  in  the  last  generation  a  man 
of  active  habits,  polished  manners,  and  enterprising  disposition,  who 
was  a  great  favorite  in  the  community.  But  his  judgment  was  unequal 
to  his  enterprise.  He  had  failed  to  succeed  in  one  or  two  positions  en- 
trusted to  him  (not  mercantile)  ;  but  he  was  one  of  that  style  of  men  who 
are  never  daunted  by  adversity. 

Soon  after  his  last  failure  he  conceived  the  idea  of  establishing  a 
new  industry  in  the  town,  in  furtherance  of  which  a  contiguous  water- 
power  could  be  utilized.  He  borrowed  all  the  money  he  could  from  a 
member  of  his  family,  bought  the  necessary  ground  and  water-power, 
and  made  arrangements  with  a  firm  of  contractors  to  erect  the  buildings, 
These  builders  were  men  of  considerable  means,  customers  of  one  of 
the  local  banks,  and  were  in  such  high  credit  that  paper  bearing  thei? 
name  could  be  readily  discounted  for  considerable  amounts. 

The  contract  was  signed,  the  buildings  proceeded  with,  and  month 
by  month  the  proprietor  of  the  new  concern  gave  his  notes  in  payment 
as  the  work  proceeded,  which  notes  the  bank  discounted.  Such  notes 
had  not  a  good  banking  foundation,  as  will  be  seen,  but  the  local  mana- 
ger, a  man  of  large  experience  and  known  to  possess  an  intimate  knowl- 
edge of  the  peo})le  of  the  district,  reported  the  parties  to  be  good  beyond 
question.  The  paper  was  therefore  allowed  to  pass  for  a  time  at  the 
head  office,  with  but  little  criticism. 

As  the  buildings  went  on,  the  total  amount  of  the  notes  increased; 
a  hope  however  being  cherished  that  money  to  retire  them  could  be 
obtained  by  borrowing  on  the  new  buildings  when  finished.  In  this 
hope  all  parties  were  doomed  to  disappointment.  The  projector,  how- 
ever, went  on  cheerily  in  his  usual  sanguine  way,  and  the  only  parties 
that  felt  uneasiness  were  the  contractors  and  the  bank  manager.     The 


231  BANKING    AND    COMMERCE. 

liability  of  the  contractors  to  the  bank  as  endorsers  had  gradually  in- 
creased to  an  alarming  sum,  and  the  manager  of  the  bank  began  to  feat 
for  his  own  position,  in  case  his  advances  did  not  turn  out  well. 

It  was,  however,  necessary  to  go  on;  for  if  stoppage  had  ensued, 
all  parties  would  have  been  left  with  that  most  undesirable  of  all  assets, 
an  imfinished  pile  of  buildings.  As  they  stood,  they  had  already  cost 
more  than  three  times  as  much  as  it  was  supposed  would  be  sufficient  to 
finish  them.  But  many  thousands  of  dollars  were  still  required  before 
they  could  be  ready  for  the  plant,  machinery  and  power.  The  buildings 
however,  were  finished  at  last.  But  the  projector's  calculations  as  to 
the  cost  of  the  plant  were  just  as  erroneous  as  they  had  been  with  regard 
to  the  buildings.  But  plant  and  machinery  must  be  procured  and  placed; 
after  which  there  might  be  a  possibility  of  the  advances  being  in  some 
way  recouped.  At  all  events  the  business  might  begin  to  earn  money. 
So  advances  went  on,  and  an  apparently  finely-equipped  establishment 
stood  on  tlie  ground.  But  no  money  could  be  borrowed  on  it  until  it 
had  proved  itself  capable  of  making  profit  for  its  owners.  By  this 
time  it  became  evident  that  the  bank  practically  owned  the  concern 
The  advances  were  represented  by  notes  that  were  far  indeed  beyond 
tlie  ability  of  the  parties  to  pay,  and  the  only  hope  of  good  results  was 
in  the  carrying  on  of  the  business.  The  unfortunate  manager  therefore 
begged  the  head  office  to  allow  him  to  advance  more  money  to  buy  stock, 
and  with  a  despairing  sort  of  hoping  against  hope,  this  was  consented 
to.  This  stock  was  not  only  a  stock  of  raw  materials,  but  of  animals 
to  consume  the  refuse. 

^Manufacturing  then  began,  but  the  product  was  not  satisfactory. 
Considerable  amounts  of  the  goods  were  returned  by  purchasers,  or 
heavy  reductions  required  from  invoices.  The  promoter,  who  maintained 
his  cheerfulness,  even'  under  these  circumstances,  now  suggested  that 
certain  alterations  be  made  in  the  machinery,  and  managed  to  persuade 
the  bank  to  increase  its  advances  for  the  purpose. 

Thus  matters  went  on  for  about  a  year.  The  concern  never  made 
a  doUar  of  profit.  The  burden  of  interest  on  the  huge  advances  ground 
the  business  slowly  doM^n,  and  caused  the  advances  to  go  slowly  up. 
Finally  the  bank  authorities  determined  to  bring  the  affair  to  a  stop. 
It  was  impossible  to  sell  the  establishment;  for,  notwithstanding  the 
money  spent  upon  it,  it  had  not  been  well  planned  and  never  could  have 
made  money.  The  stock  of  raw  material  was  worked  up,  the  product 
sold  off,  so  were  the  animals,  everything  was  realized  on,  and  the  place 
finnlly  dismantled,  to  remain  to  this  day  an  object  lesson  to  passers-by 
of  the  folly  of  projecting  a  great  enterprise  without  means,  and  of 
lending   huge   sums   of   money   without   tangible   security. 

But  when  the  sto])page  transpired,  a  very  singular  circumstance  came 
to  light. 

Long  before  the  final  catastrophe  the  wrath  of  the  bank  authorities 
had  burst  on  the  head  of  the  unfortunate  manager,  and  it  was  intimated 


LOSSES    IN    OTHER    LINES    OF    BUSINESS.  235 

that  unless  he  could  get  the  account  secured  he  would  lose  his  position. 
Upon  this  he  sought  an  interview  with  his  friends,  wlio  comprised  nearly 
every  man  of  position  in  tlie  town,  and  his  influence  was  so  great  that 
many  of  them  were  persuaded  to  assume  a  share  of  the  security  for  the 
debt*.  Some  of  them  endorsed  for  $5,000;  some  for  more  (large  sums  in 
that  locality)  and  thus  assumed  obligations  they  could  ill  afford  to  meet. 
But  thev  had  to  pay  the  whole  amount,  and  some  of  them  were  im- 
poverished for  years  thereby. 

The  loss  to  the  bank  was  cons'iderably  reduced  by  the  severe  measures 
taken;  but  it  was  still  enormous,  considering  the  amount  of  business  to 
be  done  in  tlie  town.  Indeed  it  was  estimated  that  the  profits  of  ten  or 
twelve  good  years  of  the  branch  would  be  swallowed  up  by  it. 

As  for  the  parties  themselves,  the  prime  mover  came  out  as  he  went 
in,  except  tliat  in  addition  to  being  worth  nothing,  a  heavy  and  uncol- 
lectible load  of  debt  was  registered  against  him.  His  relatives  had  lost 
all  they  had  lent  him;  and  the  endorsers  lost  all  they  had  put  their 
names  to. 

He  could  not,  of  course,  remain  in  a  town  where  every  second  man 
he  met  had  lost  money  by  him.  He  therefore  took  a  situation  in  a  dis- 
tant town,  and  passed  into  obscurity.  The  contractors  were  hopelessly 
ruined;  a  hard  fate  for  men  who  had  always  maintained  an  unblem- 
ished reputation,  and  who,  previous  to  that  aifair,  had  practically  retired 
with  a  competency. 

The  bank  manager  was  well  on  in  years  at  the  time  of  tliis  fiasco, 
and  only  retained  his  position  for  a  short  time  afterwards.  He  also  left 
the  town,  and  never  again  held  up  his  head  in  banking  circles. 

As  to  the  bank,  it  was  doing  so  well  on  the  whole  that  even  a  loss 
of  this  kind  could  be  written  off  without  attracting  notice. 

Failures  and  Losses  in  the  Lumber  and  Timber  Trades 

^Nlanv  years  ago  it  was  common  for  the  exporters  of  heavy  timber 
from  Quebec  to  procure  supplies  of  certain  kinds  of  hard  wood  from 
the  forests  of  Michigan  and  Ohio.  This  business  was  one  calling  for 
considerable  bank  advances  spread  over  many  months  of  time.  It  was 
a  highly  remunerative  one  in  good  seasons,  and  no  man  had  succeeded 
better  than  a  certain  Ontario  manufacturer  who  was  well-known  in 
Quebec  as  a  heavy  producer  of  timber,  and  esteemed  as  a  man  of  sterl 
ing  integrity.  In  a  certain  year,  however,  he  concluded  to  vary  his 
operations,  while  still  looking  to  Michigan  for  his  supplies,  to  export 
timber  in  a  manufactured  condition;  that  is  in  the  shape  of  deals.  He 
was  in  high  credit  with  his  bankers  and  in  the  trade,  and  had  no  difficulty 
in  making  contracts  for  large  amounts  with  many  of  the  sa\VTniU3  of 
the  State.  In  fact,  the  contracts  were  on  a  scale  far  beyond  anytliiug 
that  had  been  attempted  before;  based  on  the  idea  of  continued  pros- 
perity in  the  business  and  of  large  profits  that  awaited  the  conclusion  of 


236  BAVKIXG    AND    COMMERCE. 

the  enterprise.  But,  as  has  been  observed,  the  himber  and  timber  busi- 
ness is  subject  to  recurring  cycles  of  expansion  and  depression:  the 
depression  at  times  being  so  severe  as  not  only  to  render  it  impossible  to 
make  profit,  but  impossible  to  avoid  heavy  loss,  even  with  the  closest 
management.  It  was  while  these  operations  were  in  an  early  stage 
that  a  period  of  heavy  depression  set  in.  Prices  fell  continuously  month 
after  month;  indeed,  so  severely  did  the  revulsion  press  upon  exporters 
that  cargo  after  cargo  was  at  that  time  sent  abroad  from  Quebec  which 
scarcely  realized  more  than  freight  and  charges,  leaving  the  whole  cost 
of  the  article  as  a  loss.  Better  would  it  have  been  in  some  cases,  as  a 
merchant  once  told  me,  to  have  sunk  the  whole  cargo  in  the  St.  Lawrence. 
This  had  come  to  be  the  condition  of  the  trade  at  the  time  now  spoken 
of.  It  was,  however,  impossible  to  stop  operations  when  once  begun. 
Numerous  gangs  of  men  were  out  in  the  woods;  the  contracts  covered 
the  operations  of  many  mills ;  deliveries  were  constantly  going  on  rail- 
way and  ocean  freights  had  been  engaged  both  from  Canadian  and 
American  ports.     Bank  advances  had  also  been  arranged  for. 

But  the  full  extent  of  the  operations  had  not  been  disclosed.  They 
had  only  been  spoken  of  in  general  terms.  But  as  weeks  passed  on  it 
became  evident  that  to  carry  these  operations  through  a  far  larger  amount 
of  money  would  be  required  than  had  been  spoken  of.  It  seemed  a» 
absolute  necessity  to  make  further  advances  on  a  very  large  scale,  in 
fact  to  an  amount  altogether  unprecedented.  There  was  not,  on  the  part 
of  the  bank,  such  a  strict  style  of  dealing  with  the  account  as  its  magni- 
tude called  for.  In  fact,  the  glamour  of  the  customer's  former  sue 
cesses  somewhat  blinded  the  bank's  judgment.  Matters,  therefore,  went 
on.  The  advances  mounted  up  to  hundreds  of  thousands.  The  contracts 
were  finished  and  a  prodigious  accumulation  of  exportable  merchandise 
gathered  together.  It  was  then  moved  forward  to  tide  water.  Ocean  ship- 
ments began.  Sales  took  place  in  Liverpool  and  other  British  ])orts.  lint 
the  unwonted  supply  still  further  depressed  the  market;  and  finally  the 
affair  was  wound  up,  leaving  the  party,  after  all  the  merchandise  had  lucn 
realized,  indebted  to  the  bank  some  hundreds  of  thousands  of  dollars. 

^lany  other  parties  were  involved,  directly  or  indirectly,  in  these  or 
subsidiary  operations,  and  the  downfall  of  the  firm  brought  many  men  to 
ruin  who  had  hitherto  been  regarded  as  men  of  substance.  The  catastrophe 
was  the  heaviest  that  ever  transpired  in  the  trade;  more  than  one  bank 
was  involved  in  heavy  loss;  and  the  lessons  are  not  likely  to  be  forgotten 
in   this   generation   at   least. 

It  may  be  reasonably  asked,  how  it  could  come  about  that  a  trader 
who  had  been  uniformly  successful  in  timber  operations  should  have  made 
such  a  prodigious  fiasco  in  a  line  of  business  so  nearly  related,  even  if  a 
time  of  depression  had  set  in.  To  this  the  answer  must  primarily  be 
that  the  trader  had  entered  upon  operations  that  were  immensely  beyond 
anything  he   had   attempted   before,  and    for  which   his   capital   was   ab- 


LOSSES    IX    OTHER    LINES    OF    BUSINESS.  237 

surdly  inadequate.  But  in  addition  to  this,  the  operations  Avere  such  as 
he  liad  had  no  experitnce  in.  He  was  an  expert  in  timber,  but  knew 
nothing,  practically,  of  deals.  For,  although  the  business  of  making 
timber  and  manufacturing  deals  both  originate  in  the  forest,  there  is 
an  absolute  difference  in  the  modus  operandi  even  from  the  very  outlook; 
as  has  been  shown.  The  experience  gained  in  one  will  not  qualify  a  man 
for  dealing  with  the  other.  And  Canada  furnishes  more  than  one  in- 
stance of  the  folly  of  attempting  an  interchange. 

There  is,  however,  something  more  to  be  said  about  this  remarkable 
case.  After  the  great  break-up,  and  when  the  methods  of  the  firm  were 
brought  fully  to  light,  it  was  discovered  that  the  expenditures  had  been 
characterized  by  extraordinary  recklessness.  The  close  and  careful 
style  of  former  successful  days  had  been  completely  abandoned,  and  pur- 
chases, contracts  and  disbursements  were  carried  on  from  the  office  for 
months  together  apparently  on  the  principle  that  "money  was  no  object." 
The  parties  concerned,  in  fact,  had  completely  lost  their  heads  in  the 
magnitude  and  multiplicity  of  their  operations,  the  result  being,  that  the 
stock  which  had  been  manufactured  had  cost  them  enormously  more 
than  it  should  have  done. 

For  this  state  of  things,  no  little  blame  must  be  laid  upon  the  firm's 
bankers.  They  ought  to  have  seen  what  was  going  on  at  an  early  stage, 
and  applied  an  eflectual  check  to  it.  But  the  large  profits  (apparently) 
being  realized  from  the  account  (and  on  paper  they  were  simply  im- 
mense) completely  blinded  the  judgment  of  the  officials  who  had  to  do  with 
it.  They  therefore  went  on  supplying  the  parties  with  money  in  a  most 
profuse  style,  and  so  continued  until  the  great  catastrophe  supervened. 

Another  instance  of  the  folly  of  a  man  passing  from  one  department 
of  the  timber  trade  to  another  of  which  he  knows  nothing,  will  now  be 
given. 

In  a  certain  timber  district  of  this  continent  a  person  had  grown  up 
amidst  forest  surroundings,  who  by  shrewdness  and  close  attention  to  his 
business  of  manufacturing  timber  had  succeeded  in  acquiring  a  con- 
siderable c.-ipital.  The  business  continued  to  be  carried  on  by  his  suc- 
cessors, but  in  time  a  change  began  to  be  perceptible  to  the  bankers  of 
the  firm,  in  the  fact  that  advances  were  not  periodically  paid  off  as  for- 
merly. Inquiry  elicited  the  fact  that  the  firm,  without  informing  their 
bankers  of  the  change,  had  ceased  to  be  makers  of  heavy  timber  and 
entered  upon  the  business  of  saw  milling.  They  had,  in  fact,  expended 
the  whole  of  their  capital  and  not  a  little  of  the  bank's  advances  in  the 
erection  and  equipment  of  a  sawmill  in  an  adjoining  district,  and  the 
purchase  of  limits  suitable  for  lumber  operations.  This  was  a  line  of 
business  of  which  they  knew  practically  nothing.  As  was  to  be  ex- 
pected, they  made  mistakes  both  in  the  site,  the  building,  and  the  equip- 
ment of  the  mill.  The  business,  naturally,  did  not  prosper.  The  firm 
steadily  lost  money.  There  are  intricate  points  in  the  manufacture  of 
lumber  of  which  the  firm  only  knew  theoretically.     The  times  also  were 


23S  BANKING    AND    COISIMERCE. 

not  favorable.  The  enterprise  was  commenced  in  deception,  for  they 
had  deceived  the  local  manager  of  the  bank  as  to  the  purpose  for  which 
advances  were  required,  and,  after  struggling  along  for  a  year  or  two. 
they  came  to  a  stop.  The  business  was  closed.  The  mill  and  limits  were 
disposed  of.  All  the  property  of  the  partners  was  realized,  after  which 
there  remained  a  heavy  debt  to  the  bank  which  had  to  be  written  off 
as  a  loss.  The  mill  has  long  ago  been  dismantled  and  abandoned,  and 
all  that  remains  is  the  memory  of  a  once  honorable  and  prosperous  firm, 
who,  in  an  evil  day,  were  tempted  to  abandon  the  pursuit  to  which  they 
had  been  brought  up,  and  enter  upon  operations  of  which  they  knew 
nothing. 


CHAPTER  XXX. 
FRAUDS,  FORGERIES  AND  DEFALCATIONS. 

Frauds    Perpetrated     from     the     Inside     of    the     Bank — Specific 
Insiances  Narrated — Danger  fro.m  Forgery. 

CONSIDERING  the  enormous  amounts  of  money  and  negotiable  re- 
presentatives of  money  in  the  shape  of  checks,  drafts,  etc..  that 
pass  tlirough  the  hands  of  bank  officer^,  it  is  remarkable  how 
little  irregularity,  on  an  average,  occurs  in  connection  therewith. 
Through  the  hands  of  various  officers  of  a  single  one  of  the  larger  banks 
in  Canada  there  nnist  pass,  at  least,  many  thousands  of  millions  of  dol- 
lars every  year;  yet,  year  after  year  will  sometimes  pass,  not  only  with- 
out the  slightest  defalcation,  but  without  even  a  serious  mistake,  every 
dollar  being  accurately  entered  and  duly  accounted  for.  Yet,  although 
this  may  be  the  case  in  an  average  of  instances,  there  have  arisen  at 
times,  in  the  sphere  of  banking,  very  remarkable  developments  of  fraud, 
not  only  from  without,  but  from  within.  Such  instances  are  worthy  of 
a  permanent  chronicle  in  a  work  like  the  present,  for  they  will  warn  bank 
officers  themselves  of  the  devious  ways  in  which  they  may  be  tempted  to 
walk;  it  will  warn,  also,  those  who  have  the  direction  of  them,  in  what 
quarter  dangers  may  be  lurking. 

Frauds  and  forgeries  in  connection  with  banking  obviously  divide 
themselves  into  two  classes:  those  from  without,  and  those  from  within. 
The  last  will  be  taken  first. 

Frauds  Perpetrated  From  the  Inside  of  the  Bank. 
Many  years  ago,  in  a  condition  of  things  now  almost  forgotten,  the 
manager  of  a  certain  bank  in  a  large  business  centre  stood  so  high  in  the 
estimation  of  his  superiors  that  he  would  undoubtedly,  had  the  vacancy 
occurred,  have  been  promoted  to  the  highest  office  in  the  bank.  He  had 
risen  rapidly  to  the  position  he  occupied;  and  he  filled  it  with  such  in- 
telligence and  judgment  that  there  was  every  prospect  of  his  becoming 
a  man  of  note  in  the  banking  world  generally.  But  during  the  period 
of  his  management  a  tide  of  heavy  speculation  in  a  certain  article  set  in, 
taking  its  rise  from  the  terribly  disturbed  condition  of  the  neighboring 
States  at  the  time.  The  article  speculated  in  was  subject  to  heavy  fluctua- 
tions, according  to  the  course  of  the  war,  and  many  fortunes  were  won 
and  lost  in  great  centres  of  business  at  the  time.  A  number  of  Southern 
refugees  had  taken  up  their  residence  in  the  city  where  this  manager  was 
located,  and  gradually  became  the  centre  of  constant  speculative  opera- 
tions. Brokers  were  employed  by  this  circle,  who  made  heavy  commis- 
sions on  the  sales  and  purchases  carried  on.  These  brokers  kept  large 
and  active  bank  accounts. 


210  BAXKIXG    AXD    COMMERCE. 

In  an  evil  hour  for  this  manager,  he  made  the  acquaintance  of  some 
of  the  members  of  this  circle  of  refugees  and  became  cognizant  of  the 
operations  they  were  carrying  on,  said  to  be  largely  based  on  private 
sources  of  information  at  their  command.  Acquaintance  ripened  to 
friendship  and  friendship  speedily  led  to  sympathy  with  the  ideas  that 
were  the  foundation  of  their  speculations.  They  were  all  based  upon  the 
final  success  of  their  cause. 

If  it  was  an  evil  hour  for  the  manager  when  he  first  made  their 
acquaintance,  it  was  a  far  worse  calamity  for  him  when  he  was  induced 
to  take  a  hand  in  their  speculations.  His  operations  increased  little  by 
little.  At  the  outset  it  was  only  his  own  money  that  he  risked.  But  as 
events  developed,  the  speculative  fever  grew  stronger,  and  larger 
amounts  of  money  continued  to  be  required  to  carry  them  on.  Then  it 
was  that  he  brought  the  funds  of  the  bank  into  play,  concealing  it  from 
the  authorities  by  ingenious  frauds.  It  would  have  been  impossible  to 
pass  these  transactions  through  his  own  account  without  instant  discovery. 
He  therefore  arranged  with  a  firm  of  brokers,  customers  of  the  bank, 
that  the  entries  should  all  pass  through  their  account.  The  advances 
themselves,  however,  could  not  be  reported  at  all;  they  must  be  concealed. 
The  statements  of  this  broker's  account  that  were  sent  to  Head  OfEce 
were  systematically  falsified.  Large  advances  were  concealed  by  fraud- 
ulent crediting  of  manufactured  checks.  Thus,  supplies  of  money  were 
kept  up  and  the  authorities  of  the  bank,  for  a  time,  kept  in  ignorance. 
All  this  time,  hoping  against  hope,  this  speculative  circle  were  looking 
for  some  decisive  change  in  the  course  of  events  that  would  ensure  victory 
to  their  cause.  The  manager  lived  in  the  same  atmosphere  of  hope,  and 
longed  for  a  turn  in  the  tide  which  would  enable  those  illegitimate  ad- 
vances to  be  paid  off.  The  rest  of  the  business  under  his  charge  was 
being  conducted  with  his  wonted  skill  and  judgment.  But  the  hoped-for 
turn  of  events  never  came;  on  the  contrary,  matters  became  worse  and 
worse.  The  prospects  of  the  great  cause  on  which  so  many  had  staked 
their  all  became  darker  and  darker,  until  finally,  a  decisive  event  happen- 
ed, which  ruined  that  cause  forever.  The  game  was  now  up.  All  hope 
of  repaying  advances  was  gone,  detection  was  certain,  and  the  wretched 
manager  sought  an  interview  with  the  directors  of  the  bank,  making  a 
partial  confession.  In  consideration  of  his  high  character  and  general 
success-  the  board  at  first  were  inclined  to  deal  leniently  with  him,  as 
the  element  of  fraud  was  not  confessed  at  all.  But  as  investigation  re- 
vealed the  machinery  by  which  fraud  had  been  long  carried  on,  there  was 
no  alternative  but  to  dismiss  him  from  the  service  and  to  call  upon  his 
sureties  to  make  good  the  loss. 

He  remained  in  the  city  for  some  time  after  these  events,  but  never 
again  held  up  his  head.  And  though  comparatively  young  in  years,  he 
died  a  few  months  afterwards,  a  broken-hearted  man. 

Defalcations  amongst  bank  officers,  in  most  cases,  take  the  form  of 
appropriations  b}'  those  who  Iiave  the  actual  command  of  money,  such 
as  tellers.     At  times,  however,  there  occur  cases  of  defalcation   on   the 


FRAUDS,    FORGERIES    AND    DEFALCATIONS.  211 

part  of  those  who  do  not  handle  casli,  the  fraud  being  carried  on  by 
means  of  one  or  more  confederates.  It  sometimes  happens  that  the  idea 
of  such  frauds  originates  in  the  brain  of  fraudulent  schemers  outside  the 
bank.  Tliese  become  tempters  to  wrong-doing,  and  if  they  can  find  a 
bank  clerk  willing  to  be  a  party  to  their  schemes,  he  may,  even  if  in  a 
subordinate  position,  enable  them  to  carry  on  fraudulent  operations  to 
a  very  large  amount. 

The  most  remarkable  of  such  cases  in  modern  times  is  undoubtedly 
that  which  transpired  in  the  year  19OO,  within  the  office  of  the  Bank  of 
Liverpool,  England.  The  details  of  this  singular  affair  became  known 
at  the  trial  of  the  parties  concerned,  and  seldom  has  a  more  extraordi- 
nary story  been  published.  It  is  another  case  of  truth  being  "stranger 
than  fiction;"  but  it  illustrates  what  is  found  to  be  the  general  feature  in 
all  these  transactions,  namely,  that  the  bank  clerk  or  officer  concerned 
has  made  acquaintances  or  friends  amongst  a  class  with  whom  he  has 
no  right  to  mingle.  The  case  is  rare  indeed  that  a  bank  officer  may  be 
drawn  into  connection  (through  frequenting  saloons  and  kindred  places) 
with  actual  thieves  and  burglars.  Usually,  however,  it  is  with  a  class 
who  being  at  the  outset  nothing  worse  than  speculators,  are  drawn  into 
fraudulent  transactions.  In  the  case  now  to  be  referred  to,  the  associates 
who  brought  about  the  T,ivcrpool  bank  clerk's  downfall  were  men  of  the 
"turf." 

It  is  well  known  and  "pity  'tis,  'tis  true"  that  the  habit  of  gambling 
and  betting  on  the  turf  has  largely  increased  in  England  during  the  last 
decade  of  years.  Men  of  all  classes  have  been  drawn,  more  or  less,  into 
the  vortex.  Some  of  them,  after  having  been  "scorched,"  have  had  the 
good  sense  to  withdraw  with  no  great  loss.  In  other  cases  men  have  gone 
on  plunging  deeper  and  deeper,  until  ruin  and  disgrace  closed  the  scene. 
A  career  of  betting  is  dangerous  for  any  man;  but  of  all  men  it  is  the 
most  dangerous  for  a  bank  officer.  In  the  Liverpool  case  the  beginnings 
were  doubtless  small,  and  the  gang  of  sharpers,  who  made  this  bank  clerk 
their  tool,  probably  hardly  imagined  what  possibilities  of  mischief  were 
within  their  reach,  when  they  inveigled  him  into  their  toils.  And  the  young 
man  himself,  at  the  outset,  never  dreamed  of  the  daring  schemes  of  fraud 
that  were  to  be  carried  on  by  his  instrumentality.  He  began  betting 
with  such  small  sums  as  he  could  risk  of  his  own.  But  the  time  came 
when  his  small  resources  were  insufficient,  and  the  temptation  was  pre- 
sented to  him  to  abstract  funds  from  the  bank.  From  the  moment  he 
yielded  to  this  he  was  in  the  power  of  his  confederates.  The  whole  truth 
of  the  relations  between  them  has  never  transpired,  but  the  probability  is 
that  the  modits  operandi  by  which  the  money  was  secured  was  the  result 
of  cogitations  between  all  parties  concerned.  The  men  into  whose  power 
the  miserable  youth  fell  were  evidently  familiar  with  banking  operations, 
and  it  is  not  improbable  that  the  suggestion  of  the  forging  of  customers' 
checks  came  from  them.  Forgeries  having  begun,  it  was  essential  that 
schemes  should  be  devised  by  which  it  might  seem  that  the  proceeds  of 
the  checks  were  drawn  out  legitimately.     Machinery,  therefore,  was  set 


242  BAXKINXt    AXD    COMMERCE. 

on  foot  of  a  complicated  character,  and  by  means  of  it  abstractions  went 
on  until  they  amounted  to  a  sum  which  startled  the  banking  world.  Dis- 
covery, of  course,  was  eventually  made.  The  clerk  fled.  So  did  his  fel- 
low conspirators.  The  ramifications  of  their  villainies  were  gradually 
brought  to  light.  Most  of  the  parties  were  brought  to  justice,  tried  and 
sentenced.  The  bank  recovered  a  large  part  of  the  money  out  of  which 
it  had  been  defrauded  and  charged  the  balance  from  its  special  reserve 
fund. 

But  the  most  singular  part  of  this  story  is,  that  the  young  man  him- 
self seems  to  have  derived  no  benefit  whatever  from  the  gigantic  frauds. 
He  kept  his  position  in  the  bank,  went  on  quietly  doing  his  work,  ap- 
parently spending  no  more  than  young  men  of  his  class  were  accustomed 
to.  Nor  does  he  seem  to  have  been  allowed  by  the  gang  who  had  the 
mastery  of  him  to  have  funds  placed  to  his  credit  in  a  distant  bank.  The 
men  who  were  his  masters  could  easily  have  made  him  rich,  but  that  wa.: 
far  from  their  thoughts.  To  enrich  themselves  at  his  expense,  and  build 
up  their  fortunes  on  his  ruin,  was  the  one  object  they  steadily  kept  in 
view.     He  was  their  slave,  and  as  a  slave,  they  treated  him. 

One  of  the  parties  to  the  fraud  was  never  discovered.  Some  evidence 
was  given  at  the  trial,  leading  to  the  supposition  of  his  having  taken  pas- 
sage in  a  steamer  from  France  to  England,  and  as  he  never  landed  it  was 
surmised  that  he  ended  his  career  by  suicide.  If  so.  Justice  was  balked 
of  her  prey,  for  crimes  such  as  these  men  committed  could  hardly  be 
deemed  sufficiently  punished  even  by  penal  servitude  for  life. 

In  neither  of  the  foregoing  cases  did  the  frauds  result  in  any  benefit 
to  the  bank  officer  who  committed  them.  A  case  is  now  to  be  related  in 
which  gain  was  the  object  and  in  which  measures  were  so  cunningly  con- 
trived that  success  for  a  short  time  was  attained. 

In  a  certain  bank  office,  in  one  of  the  smaller  towns  of  Canada,  a 
manager  many  years  ago  was  performing  his  duties,  on  the  whole,  in  such 
a  manner  as  to  give  satisfaction.  He  made  mistakes,  at  times,  as  other 
men  do,  in  like  positions  and  was  sometimes  reprimanded  by  his  superior 
officers  on  account  thereof.  But  he  stood  well  on  the  whole,  and  would 
doubtless,  in  time,  have  been  promoted  to  a  higher  position. 

The  ordinary  course  of  the  business  of  his  office  was  quiet  and  un- 
eventful;  but  on  a  certain  daj',  in  the  midst  of  a  winter  season,  a  rather 
singular  event  occured.  As  is  the  case  in  all  bank  offices,  the  keys  of  the 
safe  and  its  inner  compartments  are  divided  between  the  manager  and 
one  or  two  other  officers,  the  presence  of  all  being  necessary  before  the 
safe  and  its  compartments  can  be  opened.  On  the  day  referred  to,  the 
manager  told  the  accountant  that  it  would  be  needful  for  him  and  the 
"teller"  to  come  to  the  bank  rather  late  in  the  evening,  as  a  person  with 
whom  he  had  had  some  correspondence  had  business  to  transact  and  would 
arrive  by  a  late  train  and  must  leave  by  an  early  train  in  the  morning. 
This  man,  as  the  event  proved,  was  a  confederate  in  a  contemplated 
scheme  to  defraud  the  bank.     Yet  he  was  a  well-known  merchant  in  e 


FRAUDS,  rORGERlKS  AND  DEFALCATIONS.    213 

certain  line  of  business  of  which  there  was  a  good  deal  in  the  neighbor- 
hood. 

Under  the  pretence  of  a  large  transaction  Avith  this  man,  in  which  the 
officers  said  there  appeared  to  be  some  haggling  about  the  rate  of  ex- 
change, the  manager  had  the  safe  opened,  and  a  considerable  sum  of 
money  paid  over  to  him.  The  confederate  left  the  town  the  next  morn 
ing.  The  manager,  leaving  the  accountant,  as  customary,  in  temporary 
charge  of  the  branch,  went  to  Toronto  the  next  evening,  stating  that  he 
was  going  to  look  after  a  past  due  bill  and  would  return  the  following 
day.  He  did  not  return,  however,  but  remitted  the  amount  of  the  bill ; 
immediately  after  which  a  telegraphic  message  from  a  distant  city  re- 
vealed that  the  pretended  business  transaction  was  a  fraud.  On  receipt 
of  this,  the  first  thought  of  the  accountant  was,  that  the  manager  had 
been  victimized;  for  that  he,  the  manager  himself,  could  be  a  party  to  the 
fraud  was  almost  unthinkable.  However,  the  authorities  of  the  bank,  who 
had  been  conuuunicated  with,  soon  became  convinced  that  a  collusive 
fraud  had  been  perpetrated,  and  that  the  whole  proceedings  had  been 
part  of  a  prearranged  plot  to  deceive  the  bank.  The  appearance  of  the 
stranger  at  the  time,  the  haggling  about  commissions,  the  journey  of  the 
manager  after  a  delinquent  debtor,  and  his  remitting  the  amount  of  the 
past-due  bill  the  following  day,  all  were  seen  to  be  cunning  contrivances 
by  which  suspicion  was  lulled  sufficiently  long  to  enable  the  manager  and 
his  confederate  to  place  themselves  as  far  beyond  discovery  as  possible. 
The  most  enei-getic  measures  were  taken  immediately.  The  most  skillful 
of  the  man_y  law  officers  connected  with  the  bank  were  set  to  work. 
Pinkerton's  Detective  Agency  was  employed,  and  hundreds  of  telegraphic 
messages  were  sent  to  all  parts  of  the  United  States;  for  thither,  of 
course,  the  fugitives  would  be  sure  to  proceed.  The  first  trace  of  the 
delinquents  appeared  in  the  shape  of  a  parcel  of  the  notes  of  the  bank 
sent  for  redt)ni)tion  from  a  city  in  the  State  of  New  York  to  a  western 
branch  of  the  bank.  These,  on  examination,  were  found  to  be  a  portion 
of  the  stolen  money.  This  was  the  first  clue,  and  with  the  assistance  of 
the  detectives,  lawyers,  and  officers  of  the  bank,  it  was  so  well  followed 
up  that  the  fugitives  were  both  discovered  in  their  remote  hiding-places 
and  the  larger  part  of  the  spoil  recovered. 

The  story  of  their  pursuit  is  a  singular  one.  The  first  person  to  be 
communicated  with  was  the  private  banker  in  New  York  State  who  had 
forwarded  the  notes.  In  answer  to  enquiries,  he  said  that  two  men  had 
come  into  his  office  some  days  before,  and  deposited  a  large  amount  of 
money  in  Canadian  bank  bills,  stating  that  they  were  in  the  cattle  trade 
and  had  come  over  to  buy  cattle  in  the  state  of  New  York;  a  likely 
enough  story.  Tlien,  that  they  had  drawn  out  the  money  the  day  after  in 
American  bills,  to  make  payments,  as  they  said,  for  the  cattle  they  had 
bought.  The  two  men  were  evidently  the  bank  manager  and  his  con- 
federate. Detectives  followed  up  the  clue  and  ascertained  that  the  two 
men  had  proceeded  to  the  station  of  the  New  York  Central  Railroad, 
where  one  had  bought  a  ticket  for  New  York  and  the  other  for  Chicago 


244  BA\KI\G    AND    COMMERCE. 

The  manager  had  gone  to  New  York,  as  was  supposed  he  would,  and 
strange  as  it  may  appear,  he  spent  a  day  or  two  quietly  visiting  his  sister 
at  the  very  time  detectives  were  scouring  the  city  in  search  of  him.  But 
the  search  being  continued,  the  detectives  found  traces  of  a  man  resem- 
bling the  manager  as  having  left  New  York  en  route  for  the  South.  One 
of  the  higher  officers  of  the  bank,  who  was  well  acquainted  with  the  man- 
ager and  his  handwriting,  was  instantly  despatched  to  accompany  a  de- 
tective in  pursuit.  The  first  certain  trace  was  found  in  a  southern  hotel, 
on  examining  the  register  of  which  a  name  was  found  to  have  been  en- 
tered two  days  before  in  the  manager's  handwriting;  under  another  name, 
of  course.  They  were  now  on  the  track  of  the  fugitive.  Travelling 
swiftly  they  followed  up  traces  from  city  to  city,  by  means  of  his  hand- 
writing. Passing  on  from  South  Carolina,  they  traversed  the  states  of 
Georgia,  Florida,  Alabama,  Louisiana,  Mississippi,  Texas  and  Arkansas. 
All  the  traces  were  followed  up  with  the  keenness  of  a  sleuth-hound,  but 
the  fugitive  was  always  a  day  ahead  of  his  pursuers.  He  did  not  know 
exactly  what  was  being  done,  but  he  was  very  sure  that  he  was  being 
closely  pursued.  This  conviction  led  him  to  betake  himself.,  it  last,  to 
the  most  remote  and  least  frequented  parts  of  the  immense  regions  he  was 
traversing.  The  same  cunning  he  had  manifested  in  devising  the  plot 
enabled  him,  after  a  day  or  two  of  flight,  to  devise  measures  by  which  his 
pursuers  would  be  completely  baffled.  And  baffled,  at  length,  they  were. 
When  they  reached  the  farthest  portions  of  Arkansas  and  were  on  the 
border  of  the  Indian  Territory,  they  lost  the  clue  completely,  to  their 
great  vexation.  The  fugitive  had  evidently  escaped  for  the  time.  The 
pursuers  returned  and  the  bank  resigned  itself  to  the  possibility  of  a  con- 
siderable loss. 

This,  however,  was  not  to  be.  A  few  months  transpired  and  nothing 
was  heard  of  the  missing  man,  until  one  day  the  solicitor  of  the  bank  in 
New  York  received  a  letter  from  him  dated  from  an  obscure  little  town, 
in  one  of  the  far  Western  states,  stating  that  he  still  had  nearly  half  the 
stolen  money  in  his  possession,  that  he  felt  himself  to  be  like  a  hunted 
hare  that  would  certainly  be  run  down  some  day,  that  life  had  become 
perfectly  intolerable  to  him;  that  he  could  neither  rest  by  day,  nor  sleep 
by  night;  and  finally,  offering  to  make  all  the  restitution  in  his  power. 
The  bank  left  the  matter  in  the  hands  of  their  solicitor  in  New  York, 
ajid  the  greater  part  of  the  money  in  the  fugitive's  possession  was  re- 
covered. It  was  evident,  at  the  time  the  restoration  of  the  money  was 
brought  about,  that  the  man  was  utterly  broken  both  in  body  and  mind; 
and  he  died  a  short  time  afterwards. 

Meanwhile,  energetic  steps  had  been  taken  to  follow  the  clue  afforded 
by  the  ticket  to  Chicago  to  track  t)i^  confederate.  He  had  come  to 
Chicago,  that  was  proved.  But  whither  he  had  gone  was  the  difficult 
thing  to  trace,  as  there  were  dozens  of  directions,  each  leading  to  far  dis- 
tant ])laces.  in  which  lie  might  liave  sought  shelter.  ]?ut  the  fact  of  his 
having  been  in  the  lumber  trade  led  the  Pinkertons  to  suspect  that  he 
might  possibly  have  betaken  himself  to  the  distant  forest  regions  border- 


FRAUDS,    FORGERIES    AND    DEFALCATIONS.  215 

ing  on  Lake  Superior,  where  lumbering  operations  were  then  being  car- 
ried on.  It  was  winter  and  there  would  be  numbers  of  lumbering  camps 
in  the  woods.  In  some  of  these  camps  tidings  might  possibly  be  heard  of 
him.  Pursuing  this  idea,  detectives  were  sent  in  search.  The  localities 
were  very  remote,  the  area  covered  by  the  camps  was  hundreds  of  square 
miles  in  extent,  and  covered  by  dense  forest.  The  chance  seemed  very 
remote;  but  detectives  seem  almost  able  to  work  miracles  in  the  way  of 
investigation,  and  at  length,  in  one  of  these  camps,  in  a  very  remote  re- 
gion, they  heard  that  a  stranger  had  lately  made  his  appearance,  appar- 
ently a  Canadian  and  a  lumberer,  who  had  come  professedly  to  look  after 
timber  lands.  The  detectives  were  now  convinced  that  their  man  was  in 
sight.  Soon  afterwards  they  found  him  and  telegraphed  to  the  lawyer 
of  the  bank  who  had  the  matter  in  charge.  He  came  up  and  found  that 
the  confederate  had  the  larger  part  of  the  stolen  money  upon  him,  and 
so  managed  matters  that  most  of  it  was  given  up. 

Further  iNbTANCEs  of  Fraud  and  Forgery. 

Although  the  instances  of  defalcations  and  forgery  are  repeated 
one  after  another  in  these  chapters,  it  is  not  intended  to  convey  the  im- 
pression that  such  crimes  against  commercial  honor  are  common  events. 
This  is  so  far  from  being  the  case  that  of  the  millions  of  money  that 
pass  through  the  hands  ot  bank  officers  in  the  course  of  their  business, 
not  one  in  a  million  probably  is  abstracted  or  improperly  dealt  with.  Of 
the  millions  of  dollars  of  commercial  bills  draAvn  during  any  given  year, 
it  is  safe  to  say  that  not  one  in  a  million  is  forged.  A  striking  instance  of 
the  absence  of  defalcation  and  the  prevalance  of  commercial  honor  dur- 
ing a  long  course  of  years  is  furnished  in  the  history  of  the  Bank  of 
New  York.  This  bank  has  put  on  record  that  during  the  first  forty 
years  of  its  existence  no  bonds  of  suretyship  were  taken  from  its  officers, 
and  that  during  the  whole  cf  that  period  not  a  single  defalcation  occurred. 
Times  and  circumstances  have  changed  materially  since  the  period  re- 
ferred to,  and  all  banks  and  corporations  now  find  it  prudent  to  take 
such  bonds.  Yet,  even  now,  frauds  and  forgeries  are  rare  events.  But 
when  they  do  occur  they  are  not  seldom  of  so  striking  a  character  as  to 
furnish  object  lessons  to  banks  and  every  description  of  corporations. 

At  a  certain  period  in  the  history  of  the  New  England  States,  few 
bank  officers  were  more  prominent  and  respected  than  the  cashier  of  a 
certain  bank  in  one  of  their  principal  cities.  He  was  known  all  over  his 
own  state  and  highly  esteemed  as  a  man  of  honor  and  ability.  He  took 
a  prominent  part  in  the  affairs  of  the  city  in  which  the  bank  was  situ- 
ated. And  if,  at  any  time,  a  discussion  had  arisen  as  to  the  possibilities 
of  fraud  in  the  banks  of  New  England,  his  would  have  been  the  last 
name  thought  of.  But  one  day  there  began  to  be  rumored  about  the 
city,  to  the  astonishment  of  the  community,  that  there  was  something 
wrong  with  the  account  of  the  Cashier  of  the  bank. 

At  first  nobody  credited  tlie  rumor,  unless  it  might  be  a  few  cynics 
of  the  class  that  have  a  "had  opinion  of  everybody  in  general."     But  as 


246  BAXKI-N'G    AND    COMMERCE. 

the  days  went  on  the  rumor  gatliered  strength  and  took  a  more  definite 
shape.  A  defalcation  had  certainly  been  discovered.  The  amount,  as  is 
invariably  the  case,  was  exaggerated  by  rumor;  but  at  length  the  arrest 
and  prosecution  of  the  cashier  placed  the  matter  beyond  doubt.  The 
event  gave  a  shock  to  the  banking  and  commercial  community  of  the 
whole  state,  and  even  beyond  its  borders.  Numbers  of  people  felt  aS 
if  the  very  foundations  were  giving  away,  when  such  a  man  as  he  wa.<» 
supposed  to  be  could  be  guilty  of  crime.  If  such  men  as  he  could  not 
be  trusto'd.  who  was  worthy  of  confidence.^  Many  hoped  that  after  all 
he  niiglit  be  able  to  clear  himself.  The  hope,  however,  proved  fallacious. 
The  arrest  was  followed  by  trial;  the  evidence  could  not  be  controverted, 
and  he  was  found  guilty  b}'  the  jury,  regretfully  enough.  A  long  course 
of  honorable  dealing  could  only  be  pleaded  in  mitigation  of  sentence. 
This  was  doubtless  taken  into  consideration  by  the  judge,  but  the 
sentence  imposed  was  severe,  namely,  imprisonment  for  ten  years  in  the 
State  pi'nitcntiary. 

When  the  cause  of  this  sad  downfall  was  inquired  into,  it  was  found 
that  stock  speculating  had  been  carried  on  by  the  cashier  for  some  time 
back,  and  that  the  funds  of  the  bank  had  been  used  for  the  purpose. 
These  speculations  were  sometimes  very  profitable;  at  other  times  not. 
But  at  length  a  period  of  steady  losses  set  in;  calls  for  margins  could 
not  be  responded  to,  and  the  defalcations  could  no  longer  be  covered  up. 
Then  came  the  inevitable  discovery. 

But  there  was  something  behind  the  stock  speculation.  The  promi- 
nence of  this  cashier,  in  the  community  and  the  state,  had  gradually  led 
him  into  a  style  of  liA'ing  that  was  far  beyond  his  income.  It  was 
doubtless  for  the  purpose  of  adding  to  his  income,  so  as  to  enable  him 
to  keep  up  this  style,  that  stock  speculation  was  first  resorted  to.  That 
step  once  taken,  the  path  diverged  further  and  further  from  safety  and 
honor,  and  ended  in  the  catastrophe  that  has  been  narrated.  In  this  case 
the  directors  of  the  bank  can  hardly  be  absolved  from  blame.  The  style 
in  which  the  cashier  lived  was  perfectly  apparent.  The  very  house  he 
lived  in  gave  evidence  of  it,  and  they  could  not  fail  to  know  that  such  a 
style  could  not  be  supported  by  the  salary  he  was  receiving.  It  was, 
doubtless,  their  duty  to  interfere,  before  wrong-doing  had  been  develop- 
ed. Had  they  done  so.  they  would  have  saved  the  bank  from  loss  and 
their  cashier  from  ruin  and  disgrace. 

The  Danger  From  Forgery. 
Of  all  the  dangers  that  arise  in  the  conduct  of  bank  business,  forgery 
is  perha])S  the  most  difficult  to  guard  against.  The  danger  especially 
arises  from  the  fact  that  it  is  often  committed  by  persons  of  good  stand- 
ing, who  by  a  course  of  honorable  dealing  have  established  themselves 
in  the  confidence  of  the  community.  There  are,  in  every  large  commer 
cial  centre  men  in  business  whose  reputation  is  so  bad  that  they  could 
not  pass  a  forged  bill  if  they  tried.  It  is  the  men  of  good  reputation 
and  antecedents  who  astonish  the  world  at  times  by  falling  into  the  pit 


FRAUDS,    FORGERIES    AND'   DEFAECATIOXS.  217 

of  dishonor,  and  offering  forged  bills  and  documents  to  a  bank.  Of  this 
a  few  instances  will  be  given. 

At  a  certain  period,  in  the  histor}-  of  one  of  the  great  staple  trades 

of  the  Continent,  no  firm  stood  higher  than  that  of  &  Co.  The 

head  of  the  house  belonged  to  one  of  the  best  families  in  the  country, 
and  the  name  itself  Mas  a  synonym  for  all  that  was  honorable  and 
respectable.  They  carried  on  business  in  more  than  one  centre  of  trade, 
and  were  known  as  amongst  the  largest  exporters  of  the  commodity  they 
dealt  in.  They  were  bona-fide  merchants,  who  actually  handled  the 
goods  they  exported;  not  mere  schemers,  who  lived  by  speculation  and 
engineered  "corners"  in  the  trade.  This  firm,  like  other  firms,  had  its 
good  and  bad  years.  But  if  any  one  had  made  a  guess  as  to  the  possi- 
bility of  any  house  on  'Change  doing  anything  dislionorable,  this  firm 
would  have  been  ruled  out  of  the  supposition  at  once. 

One  day,  in  the  midst  of  a  busy  season,  the  head  of  this  house  pre- 
sented shipping  documents  to  a  bank  with  whom  they  dealt;  that  is,  bills 
of  lading  and  policies  of  insurance,  for  a  large  amount  of  merchandise 
to  be  shipped.  An  advance  was  made  npon  them  with  the  usual  margin. 
A  da}'  or  two  afterwards  the  city  was  startled  by  the  news  that  this  firm 
had  stopped  payment.  The  news  did  not  particularly  disturb  the  bank, 
for  their  advance  was  apparently  well  covered  by  securities.  The  only 
irregular  feature  was  that  the  bills  of  exchange,  which  should  naturally 
have  been  drawn  against  the  merchandise  shipped,  had  not  been  brought 
in  as  customary.  The  bank  had  bills  of  lading  however.  This  would 
keep  them  safe.  The  idea  of  the  bills  of  lading  brought  in  by  such  a 
firm  being  forged  was  inconceivable.  But  this  proved  to  be  the  case. 
The  whole  of  the  documents  were  forgeries,  bills  of  lading  and  policies 
of  insurance  together,  skillfully  contrived  by  the  head  of  the  firm,  in 
order  to  present  a  perfectly  genuine  appearance.  He  Avas  the  guilty 
party,  and  was  arrested  at  once.  Trial,  of  course,  followed.  The  facts 
were  indisputable,  and  the  only  plea  put  in  was  insanity — a  plea  that 
might  well  carry  some  weight  in  such  extraordinary  circumstances.  For, 
though  such  a  firm  might  possibly  fail,  the  failure  would  not  have  been 
an  extraordinary  matter  in  that  trade,  in  a  time  of  falling  markets.  And 
such  a  failure  would  carry  no  stain  of  personal  dishonor  compared  with 
that  which  would  arise  from  the  commission  of  a  crime.  It  might  well 
be  called  an  act  of  moral  insanity  for  a  man  to  perpetrate  such  a  deed 
on  the  eve  of  insolvency;  for  its  effect  was  merely  that  some  one  or  more 
of  his  creditors  would  be  paid  in  full,  while  another  creditor  would  be 
created  to  an  equal  amount.  It  was  not  moral  insanity,  however,  that 
was  pleaded;  but  actual  insanity:  such  insanity  as  would  make  the  party 
irresponsible  for  his  actions,  and  justify  his  incarceration  in  a  lunatic 
asylum.  The  plea  carried  weight  to  this  extent,  that  the  judge  who 
tried  the  case  ordered  that  the  prisoner  be  committed  to  the  state  lunatic 
asylum,  for  the  purpose  of  testing  whether  he  were  insane  or  not. 

Meanwhile  the  affairs  of  the  firm  were  placed  in  the  hands  of  an 
assignee,  and  the  usual  course  in  such    cases    was     followed.     Scarcely 


248  BANKTXG    AND    COMMERCE. 

enough,  however,  was  realized  to  pay  the  costs  of  liquidation,  aiiJ  tht 
bank  concerned  lost  the  whole  amount  of  its  advance.  The  head  of  the 
firm  remained  in  the  asylum  for  a  time,  and  was  then  relegated  to  the 
custody  of  the  officers  of  the  law,  no  definite  decision  having  been 
reached.  Strong  influences  were  brought  to  bear,  and  the  court  finally 
allowed  the  prisoner  his  liberty,  under  an  engagement  of  reappearance. 
As  time  went  on,  the  case  and  its  circumstances  and  all  concerned  in  it 
were  forgotten,  in  tlie  rush  of  new  events.  The  affair  sank  into  oblivion^ 
and  has  so  remained  to  this  day  so  far  as  the  public  are  concerned  The 
directors  and  officers  of  the  bank,  however,  are  not  very  likely  to  forget 
it.  The  case  is  one  of  the  most  singular  developments  of  human  nature, 
and  human  folly,  that  ever  arose  in  banking  annals. 

The  only  comment  that  can  be  made  upon  the  action  of  the  bank  in 
the  case  is  that  they  should  have  noticed  that  the  application  was  for  a 
loan  on  bills  of  lading,  instead  of  for  the  negotiation  of  a  bill  or  bills 
of  exchange,  with  the  bills  of  lading  attached.  Enquiry  might  have 
been  made  why  the  usual  course  was  not  followed.  Any  departure  from 
the  ordinary  course  of  things  may  naturally,  at  any  time,  give  rise  to 
enquiry.  In  fact,  it  should  always  do  so,  as  such  a  departure  is,  at  times, 
an  indication  of  a  more  grave  irregularity  than  a  mere  matter  of  form. 
In  this  case  it  is,  at  least,  possible  that  enquiry  might  have  revealed 
something  that  would  have  put  the  banker  on  his  guard.  Some  hesita- 
tion in  manner  might  have  been  apparent,  some  awkwardness  in  ex- 
plaining the  reason  why  bills  were  not  offered,  some  contradiction  in 
statement,  that  might  have  led  to  a  request  for  time  to  consider  the 
matter,  which  consideration  might  have  led  to  further  enquiry,  which 
would  have  exposed  the  contemplated  fraud.  And  though  it  is  easy  ta 
be  "wise  after  the  event,"  there  can  be  no  doubt  that  a  considerable  part 
of  the  most  valuable  experience  that  a  banker  possesses  is  a  record  or 
recollection  of  just  such  occurrences  as  are  noticed  in  these  chapters. 

Of  a  very  different  description  is  the  case  now  about  to  be  presented. 

In  a  certain  district  of  the  northern  part  of  this  continent,  few  men 
had  a  higher  reputation  some  years  ago  than  the  treasurer  of  certain 
country  municipalities,  who  united  to  put  their  financial  affairs  into  his 
keeping.  His  account  was  with  one  of  the  banks  of  the  district,  and  for 
some  time  had  been  carried  on  satisfactorily.  These  municipalities  were 
in  the  habit  of  borrowing  sums  in  anticipation  of  taxes  to  be  collected, 
which  loans  were  upon  certified  resolutions  of  the  municipalities  But 
one  day  a  rumor  spread  abroad  that  this  gentleman  had  disappeared; 
then,  following  upon  this  that  he  had  large  amounts  of  the  funds  of  the 
municipalities  in  his  possession.  Enquiry,  of  course,  followed.  It  was 
then  discovered  that  some  of  the  documents  on  which  the  treasurer  had 
obtained  money  were  forgeries,  the  result,  of  course,  being  that  the 
municipalities  were  not  responsible.  Detectives  were  set  to  work,  and 
the  manager  of  the  bank  was  authorized  to  follow  the  fugitive,  accom- 
panied by  a  local  constable  who  knew  him.  Traces  were  found  here  and 
there,  at   points   further  and    further   south,  and   it    became    evident    at 


FRAUDS,  FORGERIES  AND  DEFALCATIONS.    249 

length  that  he  was  on  his  way  to  Mexico.  He  crossed  the  Rio  Grande 
and  thqn  supposed  he  was  perfectly  safe,  there  being  no  extradition 
treaty  between  Mexico  and  Great  Britain.  However,  the  manager  who 
.was  a  man  of  energy  and  determination,  decided  to  continue  the  piirsuit, 
and  confront  the  forger,  if  he  coukl  find  him.  He  followed  him  to  the 
City  of  Mexico,  obtained  the  aid  of  the  British  Ambassador,  found  the 
man,  and  at  lengtli  succeeded  in  having  him  taken  to  Vera  Cruz  and  put 
on  board  a  British  steamer  bound  for  the  West  Indies.  He  was  now  in 
safe  custody.  The  manager  and  the  constable  kept  their  prisoner  in 
charge  and  had  him  transferred  to  a  West  Indian  steamer  sailing  to 
Liverpool.  From  thence  the  parties  proceeded  back  again  across  the 
Atlantic,  landed  on  British  ground,  thence  proceeding  half  way  across 
the  continent  until  they  arrived  at  the  city  where  the  fraud  had  been 
committed.  Thus,  after  a  journey  of  nearly  twenty-thousand  miles,  the 
criminal  was  brought  back,  much  to  the  astonishment  of  the  community 
where  he  had  lived,  and  especially  of  the  people  of  the  country  munici- 
palities, whose  names  he  had  fraudulently  used.  He  was  tried,  con- 
victed and  sentenced  to  a  long  term  of  imprisonment  in  the  penitentiary. 
The  energetic  action  of  the  bank  in  following  this  man  over  such  enor- 
mous distances  produced  such  an  impression  upon  that  community  that 
though  some  fifteen  years  have  elapsed  since  those  occurrences,  no  serious 
case  of  forgery  has  since  transpired  in  the  city. 

In  this  case,  it  does  not  seem  that  any  want  of  care  could  be  imputed 
to  the  bank,  in  their  dealings  with  this  man.  But  as  it  is  not  the  only 
instance,  either  in  Canada  or  the  United  States,  where  treasurers  of 
municipalities,  and  even  of  churches  and  missionary  societies,  have  com- 
mitted fraud  in  their  dealings  with  banks,  it  does  seem  desirable,  and 
necessary,  for  bankers  to  take  special  care  in  regard  to  such  accoimts, 
and  to  insist  upon  such  checks,  by  continuous  audit,  or  otherwise,  as 
would  put  efficient  obstacles  in  the  way  of  wrong-doing,  on  the  part  of 
treasurers. 

The  next  case  cited  is  of  a  totally  different  character  from  any  of 
the  preceding. 

One  of  the  most  remarkable  cases  of  forgery  that  have  transpired 
within  the  last  quarter  of  a  century  was  that  of  a  prominent  merchant  in 
a  large  seaport  of  Great  Britain,  where  an  extensive  trade  was  carried 
on  in  the  raw  material  of  the  manufactures  of  the  district.  He  was  a 
man  of  great  energy  and  ability,  not  a  native  of  the  place,  but  one  of 
that  large  class  of  foreigners  who  have  established  themselves  in  the 
centres  of  trade  of  these  times.  His  business  was  that  of  an  importer, 
and  that  on  a  large  scale.  His  customers  were  the  manufacturers  of  the 
district.  They  settled  their  accounts  by  acceptances  or  promissory 
notes.  The  "paper"  was  of  that  class  which  bankers  always  consider 
with  high  favor;  and  very  naturally,  being  founded,  when  genuine,  upon 
bona-fide  transactions,  and  both  names  to  every  bill  being  generally  of 
a  high  class.  Suddenly,  however,  an  event  happened — for  such  events 
always  happen  suddenly— which  was  the  beginning  of  a  revelation  that 


250  BANKING    AND    COMMERCE. 

astonished  the  bank  and  the  whole  district.  One  of  the  bills  was  re- 
turned protested  for  non-payment;  the  bank  at  which  it  was  payable 
having  no  advice,  and  no  funds.  The  discounting  bank  naturally  thought 
that  some  clerical  irregularity  had  transpired,  some  letter  had  been  mis- 
posted,  some  remittance  gone  astraj-,  and  notified  the  acceptors  at  once, 
expecting  a  check  in  payment  by  return  mail.  Instead  of  this  came  the 
alarming  announcement  that  the  drawees  had  never  accepted  such  a  bill 
at  all.  Recourse  was  instantly  made  to  the  merchant,  who  had,  in  the 
ordinary  way,  been  notified  of  the  dishonor  of  the  bill.  But  his  place 
of  business  was  closed  that  morning,  and  he  himself,  had  left  the  city. 
Then  gradually  came  a  full  revelation  of  the  whole,  extent  of  the  v/rong- 
doing.  Bill  after  bill  came  back  under  protest,  one  house  after  another 
wrote  in  the  same  terms  as  the  first,  namely,  that  they  had  never  signed 
such  bills.  It  was  like  a  succession  of  thunder-claps  to  the  bank,  for 
nearly  all  the  bills  were  of  large  amount,  running  into  thousands  of 
pounds.  Finally,  the  whole  extent  of  the  fraud  was  realized,  the  loss 
being  serious  enough  to  require  to  be  charged  to  the  surplus  fund  of  the 
bank.  The  fund,  however,  was  well  able  to  sustain  it,  and  the  bank 
went  on  with  its  business  as  usual. 

In  this  case,  the  general  impression  among  bankers  and  merchants  in 
the  district  was,  that  no  blame  could  be  attached  to  the  bank;  or  that 
any  imputation  of  laches,  or  negligence,  could  lie  against  the  managers. 
The  frauds  had  been  carried  on  with  extraordinary  ingenuity;  the  forger 
even  had  printed  or  engraved  copies  made  of  the  forms  used  by  the 
drawees  of  bills,  for  correspondence,  promissory  notes,  and  acceptance 
of  bills,  when  acceptance  was  made  by  a  stamp.  And  the  forger  having 
a  good  reputation,  established  trade,  and  good  connections  both  at  home 
and  abroad,  there  was  everything  in  the  circumstances  to  inspire  confi- 
dence. But,  as  has  been  observed,  it  is  generally  only  in  circumstances 
like  this  that  forgeries  of  any  extent  can  be  carried  out  at  all. 

There  is  this,  however,  finally,  to  be  said,  that  in  most  cases  of  fraud 
and  forgery,  there  arise  little  circumstances,  which  if  noticed  at  the 
time,  might  be  followed  up,  and  lead  to  increased  watchfulness  as  to 
other  circumstances,  which  course  in  some  cases  would  lead  to  a  dis- 
covery in  the  early  stages  of  wrong-doing,  and  prevent  loss  later  on. 
For  in  all  cases  of  fraud  the  tendency  is  to  grow  worse  and  worse,  the 
amount  becoming  larger  and  larger  until  discovery  puts  a  stop  to  the 
whole  affair. 

The  sum  of  the  whole  matter  is  this,  as  respects  employes:  whenever 
a  bank  officer  or  confidential  employe  of  a  mercantile  house  is  known, 
or  suspected  with  good  cause,  to  be  living  beyond  his  means,  or  to  be 
gambling,  or  indulging  in  betting,  or  keeping  company  with  gambling 
or  betting  men,  or  speculating  in  stocks — the  sooner  the  matter  is  taken 
iu  hand  the  better.     For  delays  in  such  matters  are  always  dangerous. 


CHAPTER   XXXI. 
A  BANKRUPTCY  LAW. 

Bankers    Interested    ix    the    Slbject — Oricixal    Lau'    Arose    from 

SUFI'ERINGS      OF      IMPRISONED      DeBTORS CONTINUED      FOR      VaRIOUS 

Reasons,  Though  Imprisonment  Abolished — EffecI-  of  Discharg?: 
Clause — Great  Abuses  Developed — Ax  Last  Abolished. 

IT  sliould  be  stated  at  the  outset  that  the  insolvency  of  banks  is  dealt 
with  in  special  clauses  of  the  Canadian  Banking  xVct. 

In  spite  of  the  caution  with  which  their  business  is  conducted, 
and  the  securities  they  take,  bankers  and  merchants  sometimes  find  them- 
selves confronted  with  that  ugly  spectre,  the  bankruptcy  of  their  cus- 
tomers. This  is  especially  the  case  in  those  difficult  times,  which,  as  all 
experience  shows,  are  sure  to  recur  when  the  commercial  pendulum  swings 
from  prosperity  to  adversity.  The  insolvency  of  an  important  customer 
in  a  large  centre  may  bring  a  number  of  other  insolvencies  in  its  train, 
so  that  a  banker  who  has  discounted  a  considerable  amount  of  bills  for 
a  wholesale  merchant  who  has  failed  may  find  himself,  by  that  one 
failure,  a  creditor  of  a  dozen  or  more  bankrupt  estates  in  addition. 

The  subject  is  one  with  which  all  bankers  of  long  experience  become 
unpleasantly  familiar;  dealing,  as  they  do,  with  all  sorts  and  conditions 
of  debtors  in  all  sorts  of  times.  They  can  speak,  therefore,  with  some 
measure  of  authority  on  the  subject.  For  this  reason,  whenever  Parlia- 
ment has  taken  the  matter  seriously  in  hand,  and  an  important  bankruptcy 
law  has  been  submitted  to  it,  bankers,  as  well  as  merchants,  hav-^  been 
invited  to  state  their  views  to  the  special  committee  in  charge  of  the 
subject. 

There  arc  many  causes  for  insolvenev;  some  of  them  involving  more 
or  less  of  culpability  on  the  part  of  the  insolvent.  Such,  for  esample, 
as  entering  on  business  without  experience  or  sufficient  capital ;  careless 
ness  in  carrying  on  business;  neglecting  to  insure;  neglecting  to  keep 
books;  foolishness  in  giving  credit;  idleness;  neglect  of  business  for 
politics  or  pleasure;  extravagance;  speculation  in  outside  matters,  becom- 
ing guarantee  for  others,  and  so  on. 

Nine  out  of  ten  of  the  insolvencies  that  occur  are  traceable  to  one  or 
the  other  of  the  above  causes ;  and  clearly  put  upon  a  creditor  the  respon- 
sibility of  enquiry  as  to  the  cause,  whenever  an  insolvent  debtor  seeks  to 
be  released  without  paying  his  debts  in  full. 

If  a  trader  becomes  unable  to  meet  his  obligations  there  is  nothing 
in  either  law  or  custom  to  prevent  him  approaching  one  or  more  of  his 
creditors,  and  asking  them  either  for  simple  delay,  for  a  formal  exten- 
sion, or  for  a  release  on  terms  submitted.     No  law  is  needed  to  enable 


2j2  banking    and    COMMERCE. 

the  application  to  be  made  and  dealt  with.  The  matter  is  purely  one 
for  private  negotiations;  with  this  condition,  however,  that  no  engage- 
ment with  one  creditor  will  bind  any  other.  Nor  will  an  agreement  of 
a  majority  of  creditors,  in  meeting  assembled,  bind  any  of  the  rest, 
unless  under  the  provisions  of  an  Act  of  Parliament.  And  here  we  touch 
the  fringe  of  that  complicated  and  difficult  subject  of  a  Bankruptcy  Law, 
which  has  so  often  baffled  the  wisdom  of  legislatures  to  settle  on  equitable 
terms. 

It  is  well  known  that  Canada  as  a  whole,  after  having  experienced 
the  working  of  more  than  one  general  Insolvency  Law  during  a  course 
of  years,  finally  allowed  the  last  of  them  to  lapse,  and  has  never  enacted 
another.  But  as  there  are  some  undoubted  disadvantages  in  this  lack 
of  a  general  law,  it  is  desirable,  in  a  work  like  this,  to  consider  the 
general  principles  on  which  such  a  law  should  rest,  in  case  it  occupies^ 
the  attention  of  Parliament  again;  and  Avhile  doing  so,  to  consider  how 
far  certain  laws  of  the  several  provinces  fulfill  the  requirements  of  the 
case. 

In  order  to  deal  with  this  matter  it  will  be  needful  to  "begin  at  the 
beginning,"  and  consider  the  relations  of  debtor  and  creditor  as  they  are 
affected  by  the  ordinary  operation  of  law. 

Remedies  Against  Debtors. 

When  a  debtor  neglects  or  refuses  to  satisfy  his  creditor,  the  latter 
can  invoke  the  power  of  the  law  to  compel  him  to  fulfill  his  contract. 
Every  debt  is  the  result  of  a  contract.  It  is  prima  facie  the  province  of 
law  to  enforce  the  fulfillment  of  contracts;  hence  a  creditor  can  call 
his  debtor  before  a  court,  state  his  claim,  prove  it  by  evidence  if  he  can, 
and  ask  for  judgment.  The  debtor  can  also  plead;  but  unless  he  can 
prove  that  the  claim  is  unjust,  either  as  to  time,  or  amount,  or  in  some 
other  way,  judgment  will  be  given  against  him.  It  is  needful  to  note 
that  the  powers  of  a  court  extend  simply  to  the  determination  of  the 
amount  due,  the  time  when  due,  and  to  the  enforcing  of  payment.  An 
ordinary  court  can  neither  grant  time,  nor  abatement,  nor  release. 

Following  upon  judgment,  is  the  seizure  of  the  debtor's  property  by 
an  officer  of  law,  its  sale,  and  the  payment  over  of  proceeds  to  the 
creditor.  If  the  proceeds  are  sufficient  and  the  debt  paid,  there  is  an 
end  of  the  matter.  The  law  has  fulfilled  its  object,  and  the  creditor  is 
satisfied.  But  if  the  officer  of  law  cannot  find  any  property  of  the  debtoi, 
or  if  such  property  does  not  realize  enough  to  pay  the  debt,  what  then? 

As  the  law  now  generally  exists,  and  has  done  for  some  time  past, 
it  can  do  nothing  more. 

But  under  the  old  administration  of  law  not  only  could  the  debtor's 
property  be  seized,  hut  his  person.  The  operation  of  law  was.  until  a 
recent  period,  exactly  as  it  was  1.800  years  ago,  as  described  in  a  graphic 
passage  in  the  Sermon  on  the  Mount.  Counsel  is  there  given  to  a  debto> 
as  follows,  Agree  with  thine  adversary  quickly,  whilst  thou  art  in  the 
nay  with  him;  lest  at  any  time  the  adversary  deliver  thee  to  the  Judge. 


A    BANKRUPTCY    LAW.  aSS 

.and  the  Jud^e  deliver  thee  to  the  officer,  and  thou  be  cast  into  prison. 
Verily,  I  say  unto  thee  thou  shall  by  no  means  come  out  thence  until  thov 
hast  paid  the  utmost  farthing.  This  has  a  wonderfully  modern  sound, 
for  it  exactly  describes  what  would  have  taken  place  in  England  nearly 
up  to  the  middle  of  the  nineteenth  century.  The  debtor  could  be  put  in 
'.prison,  not,  as  in  criminal  matters,  for  a  week,  a  month,  or  a  year,  but 
until  the  debt  was  paid. 

The  difference  between  tlic  criminal  law  and  that  respecting  debtors 
was  remarkable  enough.  The  criminal,  at  the  expiration  of  his  term, 
was  a  free  man  and  discharged  of  all  'obligation.  His  imprisonment 
constituted  a  sort  of  claim  to  discharge;  but  with  the  debtor,  imprison- 
ment operated  in  no  degree  towards  his  discharge.  Unless  the  creditor 
consented,  in  prison  he  must  remain  for  the  whole  of  his  natural  life. 
Numerous  cases  of  this  kind  did  actually  occur.  The  term  "rot  in  prison" 
has  become  incorporated  into  our  language,  and  expresses  exactly  what 
occurred  in  many  cases  under  the  ordinary  law. 

English  literature  tells  only  too  truly  the  stories  of  suffering  endured 
by  insolvent  debtors  in  London  prisons;  for  one  singular  feature  of  this 
matter  is,  that  while  the  Government  was  obliged  to  support  thieves  and 
burglars  while  in  prison,  no  support  whatever  was  provided  for  the 
imprisoned  debtor. 

Origin  of  Insolvency  Laws. 

It  was  under  these  circumstances  that  the  first  movement  for  an  insol- 
vency law  began.  The  object  was  primarily  the  release  of  imprisoned 
debtors;  and  the  title  of  early  acts  of  Parliament  on  the  subject  wa? 
"An  act  for  the  relief  of  insolvent  debtors;  the  relief  being,  not  to 
provide  them  with  necessary  food  and  comfort,  but  to  give  them  a  dis- 
charge from  prison  and  from  their  debts. 

Such  a  law,  of  course,  would  only  be  needed  to  compel  unwilling 
creditors  to  be  satisfied  with  what  the  ordinary  course  of  law  had  failed 
to  give  them.  Thus,  in  its  very  inception,  an  insolvency  act  contradicts 
and  traverses  the  ordinary  operation  of  law.  The  law  is  to  give  effect 
to  contracts,  but  the  effect  of  an  insolvency  law  is  to  break  them. 

But  the  cases  of  hardship,  and  even  of  cruelty,  were  so  undeniable 
that  the  force  of  public  opinion  became  strong  enough  at  length  to  insist 
upon  a  way  of  legal  relief  being  opened. 

It  was  in  these  circumstances  that  the  first  act  for  the  Relief  of 
Insolvent  Debtors  was  passed.  That  act  provided  for  the  constitution  of 
a  special  court,  whose  functions  were  to  be  the  exact  opposite  of  an 
ordinary  one.  The  ordinary  court  was  for  the  administration  of  justice: 
this  was  for  the  administration  of  mercy.  And  to  it  the  unfortunate  and 
impecunious  (but  presumably  honest)  debtor  was  allowed  to  appeal  and 
plead  for  his  release  from  prison.  His  creditors,  as  a  matter  of  course, 
were  allowed  to  appear  also,  and  to  show  cause  to  the  contrary,  if  they 
were  able. 

If  the  creditor  could  prove  that  his  debtor  was  keeping  back  money 


254  BANKING    AND    COMMERCE. 

or  effects,  or  tliat  there  was  an  element  of  fraud  in  his  conduct,  or  that 
his  statements  had  been  characterized  by  lying  or  deceit,  the  court  had 
little  mercy  to  sliow  him.  It  was  not  for  such  as  he  tliat  the  court  was 
created.  On  the  other  hand,  if  the  debtor  could  prove  that  he  had  donr 
what  he  could,  or  that  he  had  no  friends  upoi;  whom  he  could  call  for 
relief,  that  there  was  no  fraud  or  misrepresentation  in  his  dealings,  and 
particularly  tliat  he  was  suffering  in  body  and  mind  by  continued  impris- 
onment, the  court  would,  in  many  cases,  open  the  prison  doors  and  allow 
him  to  go  out  free. 

But  if  any  of  the  jolly  felloAvs  of  the  "Jingle"  or  "Smangle"  sort 
had  the  impudence  to  apply  to  the  court,  they  would  be  laughed  out  of 
it  and  sent  back  to  confinement.  In  prison  they  deserved  to  be;  and  in 
prison  they  must  remain. 

Such  was  the  general  idea  embodied  in  the  first  insolvency  leg'slation. 
It  was   for  the  administration  of  mercy. 

It  was  a  matter  of  course  that  a  class  of  attorneys  would  devote 
themselves  to  cases  of  this  kind,  and  be  kno^vn  as  men  who  could  get 
debtors  out  by  passing  them  through  "the  court."  The  M'ays  of  this 
class  and  the  incidents  arising  out  of  their  profession  are  accurately  and 
humorously  dealt  with  in  the  pages  of  many  of  our  novelists.  In  course 
of  time  a  class  of  houses  of  temporary  detention  arose,  called  "sponging- 
houses,"  M'here  a  debtor  under  arrest  was  allowed  to  remain,  under  strict 
confinement  for  a  few  days,  to  give  him  opportunity  of  effecting  a  com- 
promise with  his  detaining  creditor,  or  calling  upon  his  friends  to  help 
him   with   money. 

It  cannot  be  too  emphatically  noted  that  the  whole  raison  d'etre  of 
the  law  for  the  discharge  of  debtors  against  the  will  of  their  creditors, 
was  this  very  power  of  imprisonment.  But  for  that  it  is  very  doubtful 
if  such  a  laM-  would  ever  have  been  enacted. 

Thus,  when  imprisonment  for  debt  was  abolished,  it  might  naturally 
be  supposed  that  insolvency  laws  would  be  abolished  with  it. 

But  in  the  complicated  circumstances  under  which  credit  is  given  in 
modern  trading  and  banking,  it  was  still  deemed  desirable  to  retain  some 
other  mode  of  settling  affairs  between  debtor  and  creditor  than  the 
ordinary  process  of  law  afforded.  The  dominant  idea  of  this,  however, 
had  reference  to  a  class  of  evils  that  scarcely  existed  in  former  days. 

For  example,  it  was  sometimes  the  case  that  a  debtor  who  had  many 
creditors  would  treat  some  of  them  unfairly;  giving  a  preference  to 
one  or  more  when  he  knew  himself  to  be  insolvent,  or  paying  one  in 
full,  and  leaving  the  rest  to  scramble  for  the  balance  of  his  estate  The 
ordinary  machinery  of  law  might  itself  be  abused  to  this  end;  for  on 
becoming  embarrassed,  and  several  creditors  suing  a  debtor,  he  cou^^ 
defend  one  action,  and  allow  judgment  to  be  entered  for  another.  For 
this  the  law  afforded  no  redress. 

In  other  cases,  a  trader,  knowing  himself  to  be  unable  to  pay  his 
debts  in  full,  might  go  on  trading  at  a  loss,  wasting  more  and  more  of 
his   estate    (or   perhaps   secreting   money),   until    it  was   wasted   entirely 


A    BANKRUPTCY    LAW.  255 

away;  leaving  nothing  for  his  creditors  to  realize  upon.  Here,  again, 
the  law  aiForded  no  means  of  redress.  All  that  any  creditor  coald  do 
was  to  refuse  to  sell  the  party  more  goods,  and  to  sue  for  balance  due. 

But  the  process  of  ordinary  suits  affords  so  many  opportunities  of 
delay,  that  a  whole  estate  might  be  wasted  during  the  progress  of  one 
of  them. 

On  the  other  hand,  a  creditor  might  under  some  circumstances  obtain 
what  is  known  as  a  "snap"  judgment  against  a  debtor,  who  would  be 
compelled  to  submit  to  the  sale  of  his  goods  at  a  sacrifice  by  one  creditor, 
leaving  him  indebted  to  many  more,  while  the  means  of  payment  had 
been  taken  away. 

For  these  and  for  other  reasons,  there  arose  a  desire  on  the  part 
of  creditors  for  the  enactment  of  a  law  which  would  prevent  these  evils, 
and  ensure,  first,  an  equitable  division  of  an  insolvent  estate;  second, 
the  power  of  stopping  an  insolvent  debtor  from  wasting  his  estate:  third, 
the  prevention  of  unjust  preferences;  fourth,  the  punishment  of  fraud- 
ulent debtors. 

These  were  the  primary  objects  thought  of  when  the  subject  of  insol- 
vency legislation  was  broached  as  applied  to  debtors  who  were  person- 
ally free.  But  though  no  act  could  now  properly  be  styled  "An  Pct  for 
the  relief  of  Insolvent  Debtors;"  that  is,  by  releasing  them  from  prison, 
no  sooner  was  insolvency  legislation  broached,  mainly  in  the  interest  of 
creditors,  than  pleas  began  to  be  put  in  on  behalf  of  the  debtor.  There 
were,  it  was  alleged,  other  forms  of  relief  that  were  needful. 

Thus,  it  was  urged,  why  should  a  man  not  be  relieved  from  the  burden 
of  his  debts  when  he  had  become  unable  to  pay  them  and  surrendered 
his  assets?  What  equity  was  there  in  taking  forcible  possession  of  a 
trader's  effects  and  dividing  them  amongst  his  creditors,  unless  he  were 
discharged  from  his  debts?  And  why  should  a  man  be  forcibly  pre- 
vented from  carrying  on  his  business,  when  the  ordinary  courts  had  not 
been  appealed  to  for  redress? 

These  and  other  pleas  for  the  debtor  were  put  forth  for  considera- 
tion whenever  it  was  proposed  to  protect  the  creditor  by  a  bankruptcy 
law.  Indeed,  it  was  held  by  some  that  an  insolvency  law  was  no  insol- 
vency law  at  all  if  it  did  not  provide  on  some  terms  for  an  insolvent's 
discharge.  They  argued  that  the  very  groundwork  of  such  legislation 
was  to  relieve  the  insolvent,  not  to  assist  the  creditor.  The  creditor  is 
sufficiently  protected,  it  was  argued,  by  his  power  to  get  judgment  and 
seize  his  debtor's  goods;  why,  then,  consider  him  alone  in  the  matter? 
To  which  the  obvious  reply  was,  that  former  acts  for  the  relief  of  the 
insolvent  debtor  had  relation  to  different  circumstances.  It  was  to  prevent 
cruelty  and  oppression,  and  had  always  been  preceded  by  the  obtaining 
an  ordinary  judgment  at  law,  and  the  declaration  that  the  debtor  had  no 
seizable  goods.  But  to  discharge  a  debtor  against  the  will  of  his  creditors, 
or  any  of  them,  and  while  he  was  perfectly  at  liberty,  personally,  was 
contrary  to  the  first  principles  of  justice.  Even  to  enable  his  property  to 
be   seized   and   divided   amongst  his   creditors   was  no   valid   gromid   for 


256  BANKING    AND    COMMERCE. 

claiming  a  discharge ;  for  his  property,  if  he  was  insolvent,  really  belonged 
to  his  creditors  in  any  case. 

It  was  further  argued,  that  the  reasonable  course  for  a  debtor  to 
pursue  when  he  could  not  pay  his  debts,  was  to  approach  his  creditors 
singly,  or  call  a  meeting  of  them,  and  offer  to  pay  what  he  could,  and 
ask  for  a  discharge.  They  would  be  acquainted  with  his  affairs  and 
with  himself,  from  having  done  business  with  him,  and  might  be  trusted 
to  act  reasonably  according  to  circumstances.  And  the  necessity  for 
obtaining  the  consent  of  each  of  his  creditors  would  be  an  effectual  check 
upon  that  scheming  to  effect  an  unjust  settlement  which  was  so  great  a 
temptation  when  discharge  could  be  granted  without  that  consent. 

Principles  of  Insolvency  Legislation. 

Such  were  the  arguments,  pro  and  con,  that  arose  at  the  outset  of  any 
proposal  for  insolvency  legislation. 

Yet  there  was  much  on  which  all  parties  were  agreed.  Thus,  all  were 
agreed  that  a  law  should  be  passed  to  prevent  or  nullify  preferences; 
and  all  were  agreed  to  what  necessarily  followed,  viz.,  that  if  a  person 
were  really  insolvent  and  his  effects  were  divided  amongst  his  creditors, 
they  should  be  divided  pro  rata. 

But  there  was  division  of  opinion  as  to  the  advisability  of  stopping 
a  person  who  was  carrying  on  his  business  when  a  suspicion  arose  that 
he  was  wasting  his  estate;  also  as  to  whether  the  law  should  undertake 
to  discharge  a  debtor  at  all  if  any  of  his  creditors  objected.  If  the 
principle  of  a  discharge  Avere  agreed  to,  there  was  great  diversity  of 
opinion  as  to  its  terms,  one  class  of  legislators  leaning  towards  the  debtor, 
and  desiring  his  "relief;"  the  other  contending  for  the  claims  of  the 
creditor,  and  that  strict  justice  should  be  the  object  aimed  at. 

Another  point  of  division  was  as  to  creditors  holding  security.  The 
questions  as  to  this  were  found  to  be  numerous  and  of  an  intricate  char- 
acter; secured  creditors  naturally  pressing  their  claims  for  what  they 
considered  to  be  equitable,  against  the  views  of  others  who  were  disin- 
clined to  give  secured  creditors  any  consideration. 

The  most  difficult  question  under  this  head  arose  in  connection  with 
bankers  who  were  claiming  on  the  estate  of  a  wholesale  merchant,  for 
whom  they  had  discounted  the  bills  of  numerous  customers.  So  long  as 
the  merchant  was  solvent,  the  bank  had  no  correspondence  with  his  cus- 
tomers. But  the  moment  he  went  into  insolvency  it  became  necessary  to 
deal  directly  with  the  parties  to  this  discounted  paper.  There  might  be 
fifty  of  them;  there  might  be  one  or  two  hundred;  and  those  living  in 
all  parts  of  the  Dominion  or  elsewhere.  As  a  rule,  many  of  them  would 
be  dependent  upon  tlie  principal  house,  and  some  of  these  would  go  into 
insolvency  also.  Then  the  bank  would  find  itself  a  creditor  ot  many 
subsidiary  insolvent  estates;  while  a  certain  proportion  of  the  rest  would 
be  embarrassed  by  the  demand  of  payments  at  maturity,  and  request 
time,    possibly    also    offering    security    by    way    of    second    mortg;^ge    or 


A    BANKRUPTCY    LAW.  257 

endorsement.  With  such  an  extraordinary  mass  of  complications  arising 
out  of  the  failure  of  a  single  wholesale  house,  the  winding  up  of  its 
affairs  would  sometimes  occupy  years;  and  what  would  be  the  banker's 
final  claim  upon  the  bankrupt  estate  of  his  customer,  it  would  be  impos- 
sible to  say.  Under  the  common  law  bankers  had  a  right  to  claim  upon 
every  single  bankrupt  estate  for  the  full  amount  of  its  discounted  paper, 
and  to  collect  from  it  all  that  was  possible,  claiming  upon  one  estate 
after  another,  until  the  entire  mass  of  paper  was  paid  in  full.  And  if 
it  was  claimed  that  in  all  equity  a  bank  should  value  its  securities  and 
claim  for  the  balance,  the  bank  could  point  out  that  wliile  it  was  compara- 
tively easy  to  value  a  single  mortgage  or  even  a  single  endorsement,  it 
would  be  practically  impossible  to  value  security  consisting  of  claims 
upon  numbers  of  other  people,  some  of  them  already  insolvent,  and  some 
who  might  possibly  become  so. 

The  whole  subject  of  insolvency  bristles  with  difficulties;  but  not- 
withstanding this,  more  than  one  strong  Government  in  Canada,  and  also 
in  England  and  the  United  States,  has  taken  up  the  subject  and  carried 
through  bankruptcy  bills.  But  the  last  of  such  bills  in  Canada  came 
to  an  end  about  fifteen  years  ago,  and  although  strenuous  endeavors 
have  been  made  to  carry  others  through  Parliament,  no  Government  has 
had  the  courage  to  take  the  matter  up  and  carry  a  bill  through  as  a 
Government  measure. 

For  this  inactivity  various  reasons  have  been  assigned.  The  most  im- 
portant of  these  was  the  undoubted  fact  that  in  actual  operation  the 
former  bill  came  to  be  looked  on,  practically,  as  a  bill  for  the  promotiGn 
of  insolvency.  A  class  of  men  was  developed  in  connection  with  it,  as 
under  other  insolvent  acts,  who  made  a  special  business  of  assisting  em- 
barrassed debtors  to  obtain  a  discharge.  That  there  is  a  legitimate  field 
for  accountants  and  commercial  lawyers  in  connection  with  insolvent 
estates,  there  can  be  no  manner  of  doubt,  whether  under  an  insolvent  law 
or  without  it.  But  under  the  last  act  abuses  crept  in,  and  it  came  to  be 
generallv  known,  that  by  such  and  such  intervention,  debtors  could  obtain 
a  discharge,  with  the  least  trouble,  the  least  expense,  in  the  shortest  time, 
and  without  interruption  to  their  business.  Above  all,  the  prospect  was 
held  out  that  after  a  discharge  was  obtained  the  debtor  would  have  a 
substantial  capital  left,  and  be  enabled  to  carry  on  his  business  in  com- 
fort and  security.  In  the  opinion  of  many  observers,  the  root  of  the  mis  • 
chief  was  in  the  fact  that  a  discharge  could  be  obtained  under  the  act  if 
a  debtor's  estate  yielded  only  fifty  cents  in  the  dollar.  The  operation  of 
this  clause,  it  was  said,  was  to  fix  a  standard.  The  law  of  the  land  under 
it  recognized  that  fifty  cents  in  the  dollar  was  a  reasonable  amouiit  for  a 
debtor  to  pay.  If  he  offered  that,  he  might  be  recognized  as  an  honor- 
able man.  I  if  a  creditor  was  not  satisfied,  and  demurred  or  opposed  a  dis- 
charge, the  law  could  override  his  opinion,  and  compel  acquiescence,  un- 
less, indeed,  actual  fraud  was  proved. 

An  anomalous  condition  indeed  for  the  law  to  create;  and  it  is  well 
to  note  how  it  came  about;  also  how  it  came  to  be  so  generally  abused. 


258  BANKING    AND    COMMERCE. 

When  this  discharge  clause  was  under  consideration  by  a  parliairentary 
committee,  and  it  was  contended  tliat  fifty  cents  was  too  little,  the  reply 
was,  that  there  were  so  many  expenses  connected  with  insolvency,  and  so 
serious  a  depreciation  when  goods  and  property  were  sold  by  an  assignee, 
that  fifty  cents  in  the  dollar  was  a  fair  residuum,  and  proved  the  failure 
to  be  honest.  The  argument  was  plausible,  and  the  fifty  cents  clause  was 
adopted.  But  it  was  also  provided  that  if  the  debtor,  after  surrerdering 
his  estate  (which  he  could  do  without  stopping  his  business)  succeeded  in 
inducing  a  certain  portion  of  his  creditors  in  number  and  amount  *o  con- 
sent to  a  compromise  and  accept  fifty  cents,  a  discharge  could  be  obtained 
in  spite  of  the  opposition  of  the  rest. 

Abuses  Arising  Under  the  Law. 

Here  it  was  that  the  root  of  the  ensuing  mischief  lay.  For  the  idea 
speedily  began  to  prevail  that  there  was  no  dishonor  or  discredit  to  a  man 
who  had  failed,  if  he  had  only  paid  fifty  cents  in  the  dollar.  And  this 
was  specialh^  the  case  when  difficult  times  supervened,  and  bad  debts  rose 
above  the  average.  Under  these  circumstances  many  traders  who  were  in 
temporary  straits,  but  were  perfectly  solvent,  began  to  see  an  easy  way 
out  of  their  difriculties,  not  by  making  an  assignment  and  allowing  their 
stock  to  be  sold  and  their  accounts  collected  by  an  assignee,  but  bv  the 
much  easier  and  economical  process  of  offering  a  composition  of  fifty 
cents  or  more,  under  the  act.  Thus,  a  large  expense  would  be  sa\ed,  and 
the  business  could  go  on  in  the  meantime.  The  assignee  or  accountant 
would  receive  his  commission,  and  act  as  the  insolvent's  friend  in  per- 
suading the  requisite  number  and  amount  of  creditors  to  consent. 

It  was  not  difficult  in  ordinary  cases  for  this  to  be  secured,  for  the 
alternative  was  that  a  large  additional  expense  would  be  incurred,  much 
time  lost,  and  goods  slaughtered,  with  the  doubt  whether  some  portion 
of  the  estate  could  not  be  concealed,  and  as  a  final  result  a  smaller  divi- 
dend than  fifty  cents  declared. 

The  result  generally  was,  that  the  insolvent  who  had  got  his  stock 
into  his  hands  by  paying  fifty  cents  in  the  dollar  for  it,  was  able  to 
undersell  his  neighbors  who  had  hitherto  paid  their  debts  in  f.ill.  A 
further  result  then  followed,  vi/.,  that  some  of  his  neighbors,  whose  trade 
was  interfered  with,  began  to  think  of  passing  through  the  same  process 
themselves.  This  they  not  seldom  did,  for  money  was  to  be  made  by  it; 
moreover,  less  and  less  discredit  came  to  be  attached  to  it,  until  in  time 
the  idea  of  discredit  h'ad  almost  passed  away. 

Thus,  the  virus  of  mischief  spread  until  the  trading  community  was 
honeycombed  with  it;  and  a  wholesale  merchant  could  never  be  sure 
which  of  his  customers  would  approach  him  next  with  an  offer  of  com- 
promise. 

What  an  opportunity  this  condition  of  things  afforded  to  the  debtor 
whose  sense  of  honor  was  not  of  the  strongest,  it  is  needless  to  point  out. 
Suffice  to  say,  that  between  the  weak-kneed  debtor  who  was  temporarily 
embarrassed,  but  could   and   would  have  paid   his   debts  but  for  induce- 


A    BANKRUPTCY    LAW.  259 

ments  to  compromise,  and  the  fraudulent  debtor  who  laid  himself  out 
deliberately  to  feign  embarrassment  and  plunder  his  creditors,  the  mer- 
cantile community  became  so  disgusted  -with  the  operation  of  the  act  that 
a  universal  sense  of  relief  was  felt  Avhen  it  was  abolished. 

Difficulties  in  Framing  a  Bankhuptcy  Law. 

It  has  been  slated  that  it  is  extremely  difficult  to  frame  an  equitable 
and  serviceable  bankruptcy  law.     The  difficulties  may  be  stated  as  follows : 

First,  to  avoid  making  bankruptcy  so  easy  as  to  tempt  unscrupulous 
men  to  embrace  it  who  are  able  to  pay  their  debts.  For  this  reason  it  is 
that  the  discharge  clause  is  the  one  which,  more  than  all  the  rest,  requires 
consideration. 

Second,  to  avoid  making  the  administration  of  a  bankrupt  estate  so 
expensive  as  to  damage  both  the  debtor  and  his  creditors. 

Third,  to  deal  with  the  question  of  the  security  given  to  a  creditor 
previous  to  bankruptcy  so  as  to  avoid  doing  injustice  on  the  one  hand  bo 
the  general  body  of  creditors,  or  on  the  other  to  the  secured  creditor  him- 
self. In  this  case  the  difficult  question  is  whether  the  consideration  given 
for  the  security  was  equitable  and  reasonable. 

Fourth,  the  mode  of  adjusting  tlie  ranking  of  creditors  holding  secur- 
ity requires  special  care  and  some  technical  knowledge. 

Fifth,  it  is  found  difficult  in  practice  to  frame  a  bankruptcy  law  which 
has  not  the  effect  of  creating  a  class  of  persons  whose  interest  is  to 
promote  insolvency,  and  suggest  it. 

Sixth,  it  is  also  difficult  to  frame  penalty  clauses  which  will  not  bear 
too  severely  on  those  who  have  done  wrong  through  carelessness  or  inad- 
vertence, and  not  severely  enough  upon  traders  who  have  knowingly  and 
deliberately  been  guilty  of  actual  fraud. 

The  great  objects  to  be  obtained  by  a  bankruptcy  law  have  been 
treated  in  the  foregoing  pages,  but  may  be  briefly  summarized  in  this,  viz.: 

(1)  To  prevent  preferences  being  given  to  one  or  more  creditors  at  the 
expense  of  the  rest. 

(2)  To  prevent  debtors  wasting  or  making  away  with  their  estate 
when  getting  into  difficulties,  and  apparently  becoming  unable  to  pay  their 
debts.  Here  a  distinction  should  be  made  between  being  unable  to  meet 
engagements  as  they  become  due,  and  inability  to  pay  debts  in  full  at 
all.  It  was  a  great  error  in  some  former  proposed  bankruptcy  acts  in 
Canada  to  declare  that  a  man  was  insolvent  if  he  could  not  pay  his  debts 
as  they  became  due. 

(3)  To  insure  equitable  and  economical  distribution  of  bankrupts' 
estates;  and 

(4)  To  enable  discharge  of  competent  and  worthy  debtors  to  be  had 
on  such  terms  as  will  not  on  the  one  hand  encourage  idleness,  extrava- 
gance, and  bad  business  conduct  on  the  part  of  the  debtor;  and,  on  the 
other  hand,  will  prevent  harshness  and  cruelty  on  the  part  of  one,  or  a 
small  number  of  creditors.     A  discharge  clause  should  be  so  framed  also 


260  BANKING    AND    COMMERCE. 

as  not  to  make  it  an  object  for  a  trader  to  fail  and  make  money  out  of 
his  failure. 

If  a  bankruptcy  law  is  ever  submitted  to  a  Legislature  in  Canada,  its 
members  will,  of  course,  consider  the  former  laws  on  the  subject,  their 
excellencies  and  defects,  and  why  they  were  suffered  to  come  to  an  end; 
and  also  the  bankruptcy  laws  of  other  commercial  countries,  and  partic- 
ularly of  Great  Britain  and  the  United  States,  ascertaining  whether  such 
have  worked  satisfactorily,  and  are  accomplishing  the  end  aimed  at. 

It  would  be  well  also  to  consider  whether  a  bankrupt  law  of  limited 
scope  might  not  be  desirable;  such,  for  example,  as  one  that  would  pre- 
vent preferences,  punish  fraud,  stop  waste,  make  equitable  distribution, 
but  not  give  a  discliarge;  leaving  that  for  settlement  between  the  debtoi 
and  his  creditors. 

It  might  be  worthy  of  consideration  also  whether  a  bankruptcy  law 
might  not  be  passed  with  a  limitation  of  time,  an  idea  that  has  com- 
mended  itself  to  various  legislators. 

Summary  of  the  American  Bankruptcy  Law. 

This  law  is  a  general  one  for  the  whole  Union.  It  is  comprehensive, 
and  fairly  covers  all  the  points  to  be  considered.  It  is  precise  in  regard 
to  matters  which  were  not  clearly  dealt  with  in  former  Canadian  laws. 
It  emphasizes  in  some  of  its  clauses  the  important  distinction  between 
voluntary  and  involuntary  bankruptcy. 

But  the  distinction  is  not  sufficiently  preserved  throughout  the  act,  as 
will  be  apparent  to  any  one  who  carefully  reads  it. 

Amongst  the  numerous  provisions  of  this  act,  the  following  are  the 
most  noticeable: 

(1)  The  ordinary  courts  are  given  jurisdiction  in  cases  of  bank- 
ruptcy, and  no  special  court  for  dealing  with  them  is  created  by  the  act. 

(2)  The  words  bankrupt  and  bankruptcy  are  used  throughout,  and 
not  insolvent  and  insolvency.     There  are  good  reasons  for  this. 

(3)  Farmers  and  wage-earners  cannot  be  made  involuntary  bank- 
rupts; though  ihcv  may  be  embraced  within  the  provisions  of  the  law,  if 
they  are  willing  so  to  be. 

(4)  A  bankrupt  may  offer  a  composition  only  after  a  meeting  of 
creditors,  or  examination  in  open  court. 

(5)  A  discharge  may  be  agreed  to,  if  accepted  by  a  simple  majority 
of  his  creditors,  both  in  number  and  amount.  No  maximum  is  named  of 
either  as  necessary;  and  no  minimum  of  the  amount  to  be  paid  or  realized. 
But  no  discliarge  can  be  confirmed  unless  the  amount  of  the  composition 
and  all  preferred  claims  and  charges  shall  have  been  actually  paid  in. 
This  is  an  important  point,  and  differs  from  what  has  hitherto  prevailed 
in  Canada. 

(6)  The  judge  is  required  to  confirm  a  discharge,  if  satisfied,  (1) 
that  it  is  for  the  best  interest  of  tlie  creditors;  (2)  that  no  fraud  lias  been 
committed,  or  duty  owing  to  them  neglected;   (3)   that  the  offer  and  its 


A    BANKRUPTCY    LAW.  2(il 

acceptance  have  been  made  in  good  failh,  and  not  procured  by  improper 
means. 

(7)  But  a  composition  may  be  set  aside  upon  application  of  interested 
parties  within  si.\  months,  if  it  can  be  made  apparent  that  fraud  was  used 
in  the  procuring  of  it,  and  tliat  certain  knowledge  has  come  to  the  peti- 
tioners after  the  confirmation  of  the  discharge. 

(8)  If  a  person  who  has  been  proceeded  against  in  bankruptcy  denies 
that  he  is  insolvent,  he  is  entitled  to  have  a  trial  by  jury  as  to  whether 
he  is  so  or  not.  This  is  a  provision  we  have  never  had  in  Canadian  law. 
Its  wisdom  is  questionable,  considering  how  trials  by  jury  in  civil  cases 
often  work. 

(9)  The  question  of  preferences  and  securities  is  fully  and  equitably 
dealt  with. 

Amongst  other  clauses  relating  thereto  are  the  following: 

(a)  The  claims  of  creditors  who  have  received  preferences  shall  not 
be  allowed  unless  such  creditors  shall  surrender  their  preferences. 

(6)  If  a  creditor  has  received  preference  within  four  months  of 
bankruptcy,  and  had  reason  to  believe  that  it  was  intended  as  a  prefer- 
ence, it  shall  be  voidable,  and  the  amount  may  be  recovered.  But  if  a 
creditor  has  been  preferred,  and  afterwards  in  good  faith  gives  the 
debtor  further  credit,  this  new  credit  may  be  set  off  against  the  amount 
recoverable. 

(r)  Secured  creditors  can  only  claim  after  deducting  wliat  the  court 
may  consider  the  value  of  their  security. 

Clauses  follow  as  to  the  mode  in  which  the  value  of  such  security  is 
to  be  determined. 

(10)  The  administration  of  estates  is  to  be  by  officials  of  two  classes; 
namely,  trustees  and  referees. 

These  correspond  somewhat  to  the  liquidators  and  inspectors  under 
former  Canadian  acts;  but  they  apear  to  constitute  in  both  cases  an 
official  class  who  give  security  to  the  court  before  entering  upon  their 
duties.  These  duties  are  minutely  set  forth  in  the  act.  But  there  is  *i 
singular  want  of  preciseness  in  the  directions  horv  an  estate  is  to  be 
realized. 

The  general  underlying  principle  seems  to  be  that  the  trustees  shall 
have  the  actual  handling  of  the  property  constituting  the  estate;  while 
the  referees  are  an  advisory  and  directing  body,  for  the  purpose  of  being 
a  check  upon  the  actions  of  trustees.  It  is  made  the  duty  of  the  referee 
to  declare  dividends,  and  to  deliver  the  dividend  sheets  to  trustees;  also 
to  examine  all  the  schedules  of  the  property  of  bankrupts  together  with 
lists  of  creditors. 

(11)  The  compensation  to  the  various  classes  of  officers  is  precisely 
defined.     Economy  is  evidently  aimed  at. 

(12)  The  first  dividend  is  to  be  declared  within  thirty  days  if  the  net 
money  on  hand  amounts  to  five  per  cent,  of  the  allowed  claims.  Subse- 
auent  dividends  shall  be  declared  upon  like  terms,  and  as  often  as  the 


262  BANKING    AND    COMMERCE. 

amount  shall  equal  ien  per  cent.  But  they  may  be  declared  oftener,  and 
in  smalkr  proportions,  if  the  judge  shall  so  order. 

(13)  Offences  are  very  carefully  set  out,  and  apply  to  the  officials 
and  collusive  creditors  as  well  as  to  bankrupts  themselves. 

Altogether  the  act  is  one  which  evidences  much  care  and  thought  in 
its  compilation,  and  is  -well  worthy  of  study  if  the  government  of  Canada 
at  any  time  should  attempt  to  pass  a  general  law  upon  the  subject. 

Its  principal  defect,  and  a  very  serious  one  it  is,  lies  in  the  facilities 
it  affords  for  a  debtor  obtaining  an  easy  discharge. 

When  such  a  discharge  can  be  granted  on  the  consent  of  a  bare  ma- 
jority in  number  and  amount  of  creditors,  and  without  any  limitation  as 
to  the  amount  of  the  composition  or  dividends  declared,  the  door  is  open 
to  serious  abuse,  especially  as  it  is  provided  that  a  discharge  may  be  con- 
firmed by  the  fiat  of  a  single  judge. 

The  act  is  also  somewhat  defective  in  not  maintaining  throughout  all 
its  clauses  the  necessary  distinction  of  procedure  and  administration  in 
the  case  of  voluntary  and  involuntary  bankrupts. 

This  act  is  stated  by  men  of  experience  to  work  well  on  the  whole, 
though  it  is  not  economical  in  its  operation. 

The  following  general  suggestions  on  the  subject  are  the  result  of 
experience  and  may  be  found  worthy  of  consideration. 

(1)  If  legislation  is  attempted,  it  will  be  well  to  consider  from  tvhom 
the  pressure  for  it  originates;  what  class  in  the  community  is  calling  for 
it;  what  class  is  suffering  by  reason  of  the  want  of  it.  Is  it  the  debtor 
class;  or  is  it  the  creditor  class.''  And  what  has  each  of  them  to  say  on 
the  subject.''  A  settlement  of  such  questions  will  determine  much  of  the 
general  character  of  the  bill. 

Besides  this,  it  should  be  considered,  as  preparation  proceeds,  what 
dangers  may  arise  from  any  unwise  and  incautious  provisions  of  the  act; 
and  what  were  the  reasons  for  former  legislation  having  been  abrogated? 

(2)  The  general  framework  of  a  Bankrupt  Law  might  be  on  the 
following  lines: 

I. — The  words  should  be  bankrupt  and  hanhruptcy,  and  not  insolvent 
and  insolvency. 

II. — A  clear  distinction  should  be  made  throughout  between  the  pro- 
ceedings in  the  case  of  voluntary  assignments  and  compositions  by  honest 
debtors;  and  the  forcible  measures  necessary  in  dealing  with  a  debtor 
who  is  wasting  his  estate,  giving  preferences,  secreting  his  effects,  or 
committing  frauds,  singly  or  in  collusion. 

III. — The  procedure  throughout  should  always  keep  in  view  one  or 
other  of  the  objects  aimed  at;  that  is,  either  to  afford  facilities  for  a 
competent  and  honest  debtor  to  continue  in  business  after  dealing  equit- 
ably with  his  creditors;  in  which  case  he  might  retain  practical  possession 
of  his  estate,  or  that  the  law  should  aim  at  forcibly  depriving  a  dishonest 
and  incompetent  person  of  his  estate;  realizing  it  economically,  distrib- 
uting it  equitably,  and  closing  nut  the  business  altogether. 

IV. — Administration  in  bankruptcy  should  be  by  the  ordinary  courts; 


A    BANKRUPTCY    LAW.  263 

but  provision  to  be  made  for  special  sittings  at  definite  times  for  dealing 
with  such  cases. 

V. — A  class  of  ofiicials  to  deal  with  bankruptcy  cases  should  not  be 
created  by  law. 

VI. — Liquidators,  in  all  cases,  should  give  satisfactory  security.  Their 
remuneration  should  be  strictly  defined,  and  power  given  to  the  court  to 
deal  with  collusive  or  unreasonable  charges. 

VIL — If  a  composition  contains  preference  clauses,  it  should,  ipso 
facto,  be  thrown  out,  and  the  attempt  dealt  with  as  a  species  of  fraud. 

VIII. — Securities  should  be  accurately  defined;  and  procedure  with 
respect  to  them  set  out  with  clearness  and  precision,  yet  without  harass- 
ing unreasonably  those  who  have  an  equitable  claim  to  them.  On  the 
other  hand,  it  should  compel  surrender  of  such  as  have  been  acquired 
improperly. 

IX. — Discharge  should  in  no  case  be  granted  unless  concurred  in  by 
at  least  a  majority  of  three-fourths  in  number  and  amount  of  creditors, 
and  a  "net  result  of  seventy-five  per  cent,  to  the  creditors  has  been 
realized. 

X. — Penalties  to  be  precise,  applicable  to  definite  acts  of  wrong- 
doing, and  severe  enough  to  be  deterrent. 

In  considering  the  question  of  discharge,  too  much  weight  should  not 
be  given  to  the  plea  that  if  a  man  cannot  get  a  release  from  his  debts, 
the  community  will  lose  the  benefit  of  such  services  as  he  might  render 
to  it  as  a  trader.  For  the  very  fact  of  the  debtor's  failure  proves  that 
hitherto  he  has  not  rendered  the  service  to  the  community  that  is  desir- 
able. And  experience  proves  that  the  best  service  that  many  men  can 
render  is  as  employes  of  others,  and  not  as  traders  on  their  own  account. 
There  is  no  object,  therefore,  to  be  gained  by  granting  a  discharge  that 
may  be  disapproved  by  a  number  of  creditors  in  order  that  the  debtor 
may  be  able  to  contract  new  obligations. 

XI. — The  full  amount  of  the  composition  should  be  paid  in  or  secured 
before  discharge;  or,  as  an  alternative,  the  business  of  the  bankrupt 
should  be  carried  on  under  a  controlling  inspection,  until  the  amount  ia 
fully  realized. 

An  act  framed  in  accordance  with  these  suggestions  would  be  found 
serviceable  alike  to  the  reasonable  creditor  and  the  honest  debtor,  and 
would  be  free  from  the  drawbacks  and  disadvantages  which  led  to  the 
repeal  of  former  laws  on  the  subject. 


I 


CHAPTER   XXXII. 

INSURANCE  IN  ITS  RELATION  TO  BANKING. 

ExTENi  OF  IiN'srHAXCK — CoiT  — "FjRc-PnooK"  Strcctures  Not  Exempt 
FROM  Daxger — Life  Ixscrance. 

THE  intimate  connection  between  banking  and  insurance  may  be 
understood  when  it  is  considered  that  the  mercantile  loans  and 
discounts  of  a  bank  should  invariably  rest  on  mercantile  property 
or  movables ;  that  is  to  say,  on  goods  that  may  be  destroyed  by  fire,  which 
destruction  may  render  the  payment  of  the  loan  or  bills  difficult  or  impos- 
sible. Hence  it  is  of  the  first  consequence  to  a  banker  to  see  that  the  prop- 
erty to  which  he  looks  for  the  payment  of  his  loans  is  insured  in  sound  and 
reliable  companies.  Even  in  the  case  of  discounted  bills  for  wholesale 
houses,  it  is  perfectly  reasonable  for  the  banker  to  ask  of  his  customer, 
are  the  makers  of  these  bills  insured.^  If  their  stock  was  burned  could 
they  pay  these  notes  .^  Do  you,  in  fact,  for  your  own  protection,  see  to 
it  that  the  goods  transferred  from  your  warehouse  to  his  store  are  insured 
after  they  get  there?  It  is  to  be  presumed  that  they  are  insured  so 
long  as  they  remain  on  your  premises;  are  they  equally  safe  from  loss 
by  fire  when  transferred  to  his  ?  These  are  not  impertinent  questions,  for 
they  concern  the  very  essence  of  the  well-doing  of  both  parties.  A 
fire,  to  an  uninsured  trader,  may  mean  bankruptcy  to  him,  and  a  bad 
debt  to  his  creditors.  These  are  elementary  principles  which  are  ob- 
served, to  a  certain  extent,  by  the  majority  of  men  in  business.  But  it 
is  always  a  pertinent  inquiry  whether  property  is  insured  to  the  extent 
it  ought  to  be,  or  whether  the  person  concerned  is,  or  is  not,  one  of  the 
minority  who  take  the  risk  of  leaving  their  consumable  property  almost 
wholly  uncovered. 

Extent  of  Insurance. 

Let  us  consider  these  points  in  detail.  First,  to  what  extent  ought 
goods  to  be  insured?  To  this  there  maj'  be  more  than  one  answer,  for 
obviously  all  goods  in  transit  b}'^  sea  or  lake  should  be  insured  for  their 
full  value  at  place  of  destination.  This  is,  indeed,  a  universal  rule.  The 
bills  of  exchange  bought  or  discounted  by  bankers,  to  which  are  attached 
bills  of  lading,  have  also  attached  to  them  policies  or  letters  of  insurance 
covering  the  whole  amount  of  the  bill.  And  a  purchaser  of  such  a  bill 
would  be  negligent  indeed  if  he  passed  such  a  bill  for  discount  with  no 
insurance  policy  attached.  But  goods  in  warehouse,  store  or  factory  are 
treated  on  different  principles.  Seeing  that  insurance  costs  money,  the 
owner  of  a  stock  will  consider  what  the  probabilities  are  in  case  a  fire 
breaks  out,   and  whether  it  is  necessary  to  have  it  insured   for  its   fulT 

264 


INSURANCE  IN  ITS  RELATION  TO  BANKING.    -265 

value.  To  this  question  men  will  give  answer  according  to  their  tem- 
perament. The  cautious  man  will  insure  for  all  he  can  get  placed  on 
the  goods,  the  sanguine  and  overconfident  man  will  carry  as  much  of 
the  risk  as  he  dare  himself,  or  as  much  as  his  creditors  will  let  him.  But 
there  is  one  general  principle  applicable  to  cases  of  this  kind,  viz.,  that 
no  man  has  a  right  to  leave  uninsured  any  goods  on  which  he  owes  money. 
Property  which  is  absolutely  his  own  and  on  which  no  claim  of  any 
creditor  is  based,  a  man  may  leave  uninsured,  if  he  so  pleases.  It  is  his 
own  affair,  and  no  one  has  the  right  to  call  him  to  account,  unless  it 
may  be  his  wife  or  children,  if  he  has  them;  for,  indeed,  he  has  no  more 
right  to  injure  them  than  he  has  his  creditors. 

With  regard  to  the  great  staples  of  merchandise  stored  in  ware- 
houses, such  as  grain,  flour,  raw  cotton,  wool,  etc.,  the  custom  is  uni- 
versal to  insure  up  to  the  full  value,  if  so  much  insurance  can  be  placed. 
And  this  is  reasonable.  For,  in  a  large  majority  of  cases,  such  stocks 
have  been  advanced  on  by  banks.  In  the  case  of  merchandise  such  as 
lumber,  piled  up  in  yards  and  wharves,  or  hides,  wool,  leather  and  other 
staple  commodities  in  warehouse,  difference  of  temperament  will  lead  to 
different  lines  of  action.  It  is  in  regard  to  these  that  rates  of  insur- 
ance are  apt  to  be  high,  varj'ing  according  to  locality  and  the  com- 
bustible character  of  the  goods.  And  being  high,  men  are  constantly 
tempted  to  save  in  insurance  as  much  as  they  can.  The  only  absolute 
rule  that  can  be  laid  down  is  the  one  just  enunciated,  viz.,  that  insurance 
should  be  placed  to  the  full  amount  of  any  debt  against  the  property, 
either  direct  or  indirect.  This  is  the  very  lowest  that  justice  demands. 
A  merchant  or  manufacturer,  however,  is  bound  also,  in  considering  how 
much  his  insurance  should  be,  to  think  of  the  preservation  of  his  own 
standing,  and  the  continuity  of  his  business.  This  consideration  would 
lead  him,  even  in  cases  where  no  debt  rests  upon  the  goods,  to  insure 
for  such  an  amount  as  would  replace  them  in  case  of  fire;  and  even,  if 
possible,  to  such  an  amount  as  would  compensate  for  the  loss  of  time  and 
business  which  a  fire  would  occasion.  This  applies  particularly  to  manu- 
facturing establishments  and  mills.  In  all  cases  it  is  undoubtedly  bet- 
ter to  err  on  the  safe  side  and  to  consider  any  additional  amount  paid 
for  insurance  (if  it  is  reckoned  to  be  additional)  as  well  laid  out  in 
ensuring  that  quietude  of  mind  which  is  an  important  element  of  suc- 
cess in  business. 

The  Cost  of  Insurance. 

There  are,  however,  in  every  communitj^,  persons  who  grudge  the 
cost  of  insurance,  considering  it  as  so  much  loss,  and  prefer  to  take  the 
risk  of  fire  rather  than  pay  it.  That  this  is  a  "penny-wise-and-pound- 
foolish"  policy  such  persons  often  find  out.  But  some  men  still  lean  to 
such  a  course;  and  especially  so  where  the  occupation  is  hazardous  and 
the  risk  great.  "The  premium  is  enormous,"  such  a  person  will  say; 
"my  business  cannot  afford  it."  But  in  so  saying  they  forget  that  insur- 
ance, whatever  the  rate  may  be,  is  as  legitimate  a  charge  on  business  as 


266  BANKING    AND    COMMERCE. 

rent  and  taxes.  If  the  business  will  not  bear  the  cost  of  insurance  as 
well  as  these,  there  is  something  wrong  with  the  management.  If  a 
man  has  been  selling  his  goods  at  a  certain  price,  without  taking  the  cost 
of  insurance  into  account,  he  has  been  selling  tliem  too  low. 

But,  in  reality,  the  high  rate  of  insurance  is  a  sort  of  signal  hung 
out  to  warn  men  of  the  necessity  of  taking  unusual  precautions.  An 
unusually  high  rate  may  be  a  reminder  to  a  mill  o^vner  that  his  mill  is 
not  properly  built,  or  that  its  internal  arrangements  with  regard  to 
heating  or  power  are  not  well  contrived,  or  that  he  is  in  danger  from 
his  neighbors  and  needs  to  take  extra  precautions  on  that  score.  It 
will  warn  him  to  look  after  his  engine-i'oom,  or  his  power-house,  or  the 
manner  in  which  his  goods  are  stored,  or  whether  he  has  proper  arrange- 
ments for  carrying  about  combustibles;  or  about  smoking,  or  the  use  of 
matches.  Still  more  will  the  high  rate  remind  him  of  the  necessity  of 
appliances  for  an  early  extinguishment  of  fire  should  one  break  out.  A 
high  rate,  that  is,  a  comparatively  high  rate,  will  always  arise  from  a 
consideration  of  these  sources  of  danger,  and  should  lead,  not  to  the 
refusal  to  insure,  but  to  the  taking  of  all  possible  precautions,  and  keep- 
ing them  constantly  in  operation. 

A  man  who  neglects  to  insure  because  the  rate  is  high  would  be 
like  a  ship  owner  whose  business  is  to  sail  across  the  Atlantic,  not  build- 
ing his  ship  strong  enough  because  it  would  be  so  costly;  or  a  banker 
who  contented  himself  with  a  mere  fireproof  safe  because  a  steel-clad 
burglar-jjroof  one  would  be  too  expensive.  The  real  truth  of  the  matter 
is  that  the  higher  the  rate  of  insurance  the  more  need  there  is  to  insure. 

In  speaking  of  a  high  rate,  it  is  not  the  writer's  intention  to  refer  to 
the  rates  current  over  a  whole  city  as  compared  with  other  cities.  These 
may  be  high  or  otherwise,  but  they  affect  all  kinds  of  properties  and  all 
sorts  of  risks  in  the  same  proportion.  The  high  rate  on  which  the  fore- 
going reasoning  is  based  is  the  rate  which  is  high  in  proportion  to  build- 
ings or  stocks  in  other  lines  of  trade,  or  even  to  buildings  or  stocks  in 
the  same  trade  where  insufficient  fire  appliances,  or  defects  of  construc- 
tion or  proximity  to  other  sources  of  danger,  have  to  be  taken  into 
account. 

But  even  when  rates  are  high  over  a  whole  city  as  compared  with 
other  cities,  the  very  fact  is  a  danger-signal  to  all  who  carry  on  busi- 
ness in  it,  and  should  naturally  lead  to  extra  precaution  and  watchful- 
ness. The  same  remark  applies  to  certain  districts  in  business  centres 
where  risky  trades  are  carried  on,  and  where  a  fire  may  extend  over  the 
whole  area  of  the  district  before  it  can  be  put  out. 

"Fire-Proof"  Structures  Not  Exempt  from  Danger. 

It  is  sometimes  pleaded  by  persons  who  neglect  insurance  that  their 
premises  are  so  well-built  that  they  cannot  lake  fire;  or  that  they  are  so 
isolated  that  no  fire  of  their  neighbors  can  reach  them,  or  that  they  take 
such  i)recautions  that  no  fire  could  possibly  make  headway.     Experience, 


INSURANCE  IN  ITS  RELATION  TO  BANKING.         267 

liowevcr,  proves  how  little  reliance  can  be  placed  on  such  reasoning. 
Fireproof  buildings  have  been  burnt  down.  Iron  will  not  burn,  but  it 
-will  get  red  hot  and  set  fire  to  wood  in  proximity.  Steel  will  warp  and 
twist  under  heat  and  drag  down  floors.  As  to  isolation,  a  great  fire  will 
cause  flames  to  shoot  out  to  a  distance  that  might  be  deemed  incredible 
by  tliose  who  have  not  had  experience. 

Considerations  of  extra  precaution  or  isolation,  or  of  a  superior  style 
of  building,  may  be  fairly  taken  into  account  by  one  who  is  considering 
hoiv  much  insurance  he  will  place.  But  they  should  never  prevail  to 
such  an  extent  as  to  lead  a  man  to  neglect  insurance  altogether.  And 
no  matter  how  free  from  danger  a  man  may  consider  his  property  to  be, 
he  is  bound  to  insure  so  as  to  cover  any  indebtedness  against  it,  or 
against  its  contents.  The  first,  indeed,  will  be  certainly  taken  care  of 
by  a  mortgagee  if  there  is  any  encumbrance  against  it.  The  latter 
indebtedness  will  be  to  a  merchant  or  a  banker,  who  may  not  be  as  exact- 
ing as  a  mortgagee,  but  whose  interests  the  debtor  is  as  much  bound 
io  protect. 

Thus  far  our  observations  have  related  generally  to  stocks  of  goods, 
these  being  the  ))rimary  consideration  for  a  banker  or  a  merchant.  Real 
property  is  no  proper  basis  for  a  banker's  loans,  and  he  should  have 
nothing  to  do  with  it,  unless  it  comes  into  his  hands  as  security  for  a 
standing  debt.  Then,  he  will,  of  course,  look  after  the  insurance  as  a 
matter  of  primary  necessity. 

But  a  banker,  though  he  does  not  directly  lend  money  upon  the 
buildings  owned  by  customers,  has  nevertheless  a  strong  interest  in  their 
preservation;  for  it  is  a  banker's  interest  that  his  customer's  capital 
should  not  be  impaired,  and  that  his  business  should  go  on  without  inter- 
ruption. If  his  customer's  warehouse  be  destroyed,  it  is  a  pertinent 
■question  to  inquire  whether  the  insurance  will  cover  the  loss,  not  only  on 
the  contents  of  the  building,  but  on  the  building  itself.  For  a  person 
may  have  a  substantial  capital,  say  in  ground  or  water  power,  and  yet, 
if  his  insurance  does  not  enable  him  to  rebuild,  he  would  find  it  diflicult  to 
raise  money  to  do  it.  In  that  case,  he  may  have  to  curtail  his  business  to 
an  unprofitable  extent,  or  to  wind  it  up  altogether.  These  are  the  risks  of 
the  man  who  does  not  insure,  or  who  insures  for  an  amount  that  Is 
insufficient  for  contingencies. 

There  are,  indeed,  certain  classes  of  property  that  are  indestructible 
by  fire.  When  a  saw  miller  or  timber  merchant  has  got  his  logs  into 
the  water,  there  is  no  need  to  insure  them,  so  long  as  they  are  floating 
down  the  stream  or  confined  in  a  boom  or  cove.  They  are  so  safe  there 
that  even  an  incendiary  could  not  set  them  on  fire.  But  the  moment  a  log 
is  transferred  to  the  mill  and  sawn  into  lumber  it  becomes  combustible. 
Similarly,  stocks  of  fish,  so  long  as  they  are  in  the  boat,  are  practically 
incombustible.  But  the  moment  they  are  placed  in  a  "cannery"  or  fish 
warehouse  they  call  for  insurance.  It  is,  however,  on  such  debatable 
ground,   as   it   may   be  called,  that   negligence   or  a   disposition   to   tak** 


268  BANKING    AND    COMMERCE. 

undue   risks  may  prevail,  and   a   disastrous  fire   expose  the   folly   of  all 
parties  concerned. 

Though  it  is  not  strictly  within  the  province  of  a  banker  to  consider 
other  kinds  of  risk,  yet,  as  loans  are  sometimes  made  (as  an  exception) 
to  bodies  other  than  mercantile,  it  may  be  noted  in  conclusion  that  all  the 
foregoing  principles  apply,  with  full  force,  to  them.  No  body  of  col- 
lege governors,  or  directors  of  benevolent  institutions,  hospitals,  asylums, 
or  officers  of  churches,  has  a  right  to  allow  the  property  of  the  institution 
to  be  jeopardized  by  neglect  of  insurance.  The  obligation  is  of  neces- 
sity even  stronger  than  in  the  case  of  a  private  individual.  He  may,  if 
he  will,  jeopardize  his  own  property,  within  certain  limitations,  as  before 
stated.  But  boards  of  governors  are  trustees  and  guardians  of  the  prop- 
erty of  others.  Such  property  has  been  created  by  public  funds  or  bene- 
factions; trustees  are  bound,  therefore,  by  every  obligation  of  honor,  to 
see  that  the  property  entrusted  to  them  is  not  only  preserved  from  the 
davger  of  fire  by  ordinary  precautions,  but  from  loss,  should  fire  unfor- 
tunately break  out.  With  regard  to  institutions,  such  as  colleges,  where 
young  people  are  boarded  from  time  to  time,  it  is  obviously  the  duty  of  the 
authorities  to  insure,  not  only  the  building  and  furniture,  but  also  the 
wearing  apparel  and  other  private  property  of  the  students  and  scholars. 
It  is  unreasonable  that  parents  should  take  the  risk  of  this,  and  be 
exposed  to  the  charges  incident  to  the  refitting  of  pupils,  whose  clothing 
and  books  have  been  destroyed  by  fire.  It  is  also  incumbent  upon  college 
authorities,  where  pupils  are  boarded,  to  see,  not  only  that  their  prem- 
ises are  insured  to  a  sufficient  amount,  but  also  that  proper  precautions 
are  taken  against  the  danger  from  fire  itself.  Proper  means  of  exit  and 
preventives  against  fire  spreading  are  their  bounden  duty  to  provide.  The 
necessity  of  all  proper  precautions  being  taken  has  been  demonstrated 
of  late  (1903)  in  a  marked  degree  by  the  fires  which  have  taken  place — 
the  one  at  the  great  public  school  of  Eton,  England,  the  other  at  Ridley 
College,  Ontario,  Canada. 

Like  Insurance. 
Of  this  style  of  insurance,  all  that  needs  to  be  said  is  that  a  banker, 
if  he  advances  at  all,  will  never  advance  more  than  the  surrender  value 
of  a  polic}';  and  if  he  takes  a  policy  as  security,  will  never  consider  the 
security  to  be  more  than  such  surrender  value  amounts  to. 


(  IIAPTKU   XXXIII. 

THE    NATIONAL    BANKS    OF    THE    UNITED     STATES,     AND 
AMERICAN  BANKING. 

Absence  of  Branches- -Lack  of  Note  Redemptions — Law  of  Fixed 
Reserves — ExajMinations — Stockholders'  Meetings  in  Canada 
AND  the  United  States — Officers  of  American  Banks — Certifi- 
cation OF  Checks. 

THE   National  Bank  Act  of  the   United  States  provides  a  safe  and 
uniform  currency  for  the  whole  country,  as  has  been  shown.     But 
tliat  currency  is  subject  to  one  considerable  drawback,  as  being  a 
fixed  quantity,  and  being  incapable  of  corresponding  with  the  movements 
of  commerce.     It  wants  what  is  known  as  elasticity. 

All  experience  shows  that  agricultural  conmiunities  are  subject  to  great 
variations  in  the  amount  of  currency  required  at  different  seasons.  If 
then  the  volume  of  currency  cannot  be  enlarged  as  that  of  Canada  can, 
during  the  harvest  season,  and  that  of  Scotland  also  (on  condition  of 
gold  being  held  to  cover  it),  there  is  apt  to  arise  a  period  of  monetary 
pressure  whenever  the  crops  require  to  be  moved  to  market.  The  cir- 
culation required  at  the  harvest  season  can  only  be  obtained  by  drawing 
on  the  centres  where  it  has  accumulated  during  the  interval.  But  in  these 
centres  such  funds  are  invariably  loaned  or  employed  in  temporary  dis- 
counting. All  such  loans  must  be  called  in  when  the  harvest  demand  sets 
in,  causing  a  necessity  for  other  arrangements,  or  a  stringency  more  or 
less  developed,  and  a  rise  in  the  rate  for  money  to  abnormal  figures.  In- 
deed, such  a  scarcity  of  currency  has  been  known  to  prevail  in  the  United 
States  for  a  period  of  years,  aggravating  commercial  depression  and 
producing  widespread  disaster.  The  scarcity  of  currency  in  some  agri- 
cultural districts  at  such  times  has  resulted  in  practically  putting  them 
back  to  the  primitive  condition  of  barter."" 

Absence  of  Branches. 

Apart  from  the  system  of  currency,  with  its  excellencies  and  defects, 
the  American  banking  system  has  several  points  of  difference  both  from 
banking  in  Canada,  and  from  the  practice  of  England  and  Scotland. 
The  most  striking  of  these  differences  is  that  every  banking  office  is  a 

72  It  is  on  record  in  reply  to  enquiries  instituted  by  the  Cliamber  of  Com- 
merce of  New  Yorlv.  about  the  year  1894,  that  over  a  large  part  of  Western 
Virginia,  at  that  time,  money  had  so  completely  disappeared  that  a  person  in 
possession  of  a  $50  bill,  being  desirous  of  changing  it,  drove  more  than  forty 
miles  round  about  his  village  without  being  able  to  find  as  much  money  as 
fifty  dollars  anywhere.  At  this  very  time,  across  the  border  in  Canada,  simi- 
lar  districts    were   abundantly   supplied    with  currency. 

269 


270  BANKING    AND    COMMERCE. 

separate  corporation,  with  its  own  capital,  stockholders,  and  directors. 
Branches  are  unknown.  The  system  of  branches  never  prevailed  in  the 
United  States  to  any  extent,  and  they  have  now  entirely  disappeared. 
The  law  allows  joint-stock  banks  with  as  small  a  capital  as  $25,000,  and 
though  it  may  seem  an  anomaly  to  constitute  a  complete  corporation,  with 
the  machinery  of  a  separate  bank  for  such  a  miniature  concern,  neverthe- 
less numbers  of  such  banks  have  been  called  into  existence,  and  have  ren- 
dered the  same  kind  of  service  to  the  small  towns  of  the  United  States 
as  is  done  by  the  branches  of  banks  in  Canada. 

But  the  service  is  not  so  efficient.  For  the  branches  of  banks  in 
Canada  are  managed  by  men  who  have  been  trained  in  banking  principles 
and  practices  in  the  large  institutions  of  the  country.  They  are,  for  that 
reason,  well  qualified  to  judge  of  the  transactions  that  come  before  them, 
and  to  discriminate  against  undesirable  and  insecure  advances;  in  ad- 
dition to  M'hich  they  have  the  advantage  of  constant  advice  from  head- 
quarters. They  are  also  free  from  local  prejudices  and  predilections, 
and  are  likel}^  to  judge  of  transactions  on  their  merits.  This,  however, 
is  not  the  sole  advantage.  A  branch  of  a  large  institution  carries  Avith 
it  the  strength  and  safety  of  the  parent  corporation.  It  is  therefore  a 
safe  place  for  deposits,  in  addition  to  which  the  whole  resources  of  the 
corporation  are  available  in  case  some  enterprise  in  the  locality  should 
require  larger  advances  than  could  be  furnished  by  a  local  institution. 
Of  the  merits  of  the  branch  system  in  general,  mention  will  be  made  more 
at  large  in  the  chapter  on  Canadian  banking.  The  above,  however,  will 
suffice  to  suggest  that  the  system  of  a  separate  corporation  for  each  bank 
is  not  so  advantageous  for  small  communities. 


Note  R 


EDE.MPTIOXS. 


Another  peculiarity  of  the  American  system  is  that  there  is  no  re- 
demption of  notes.  This  has  come  about  most  naturally  from  the  cir- 
cumstances under  which  they  are  issued,  for  all  are  secured  by  deposit 
of  Government  bonds  of  the  same  quality,  all  therefore  are  nearly  equal 
in  credit  and  value.  Hence  they  are  all  treated  by  the  banks  as  money 
of  a  common  stock.  !Many  of  the  banks  have  issued  all  they  have  the 
power  to  issue.  Redemption  therefore  answers  no  particular  object  and 
is  never  carried  out. 

Law  of  Fixed  Reserves — Examinations. 

But  the  two  most  striking  features  of  American  banking,  next  to  its 
secured  but  inelastic  circulation,  are  the  requirements  b}'  law  of  a  fixed 
minimum  of  reserve  of  cash  or  its  equivalent,  to  be  kept  on  hand,  and 
next  the  system  of  bank  examination  by  Government  officials.  With  re- 
gard to  the  former  it  must  be  said  that  while  it  has  a  great  attraction  for 
those  whose  knowledge  of  banking  is  only  theoretical,  its  benefits  are  il- 
lusory in  practice.  The  system  indeed  has  two  fundamental  drawbacks. 
It   is  calculated  to  aggravate  banking  difficulties  in   time  of  embarrass- 


AMERICAN    BANKING.  271 

ment.  and  when  there  is  a  scarcity  of  money,  the  very  necessity  of  the 
case  leads  to  its  provisions  being  violated.  In  all  sound  banking  the 
keeping  of  adequate  reserves  of  available  funds  is  deemed  a  matter  of 
vital  importance,  it  being  of  the  essence  of  a  banker's  business  to  be  able 
to  meet,  at  once,  under  all  circumstances,  every  demand  made  upon  him, 
To  every  prudent  banker,  therefore,  the  amount  of  cash  reserves  he  has 
on  hand  is  a  matter  of  daily  attention;  and  the  watching  of  its  ebb  and 
flow,  and  the  replenishing  of  his  resources  when  the  demands  of  business 
cause  them  to  run  down,  a  never-ceasing  occupation.  But  a  small  con- 
sideration will  show  that  it  is  a  matter  of  imperative  necessity,  not  only 
that  he  shall  have  an  ample  stock  of  lawful  money  by  him,  but  that  he 
shall  have  command  of  the  tvhole  of  that  store  at  all  times.  If,  out  of 
this  store  of  legal-tender  money,  there  is  a  certain  amount  he  cannot 
touch,  it  is  evident  that  for  purposes  of  meeting  demands  upon  him  this 
particular  amount  might  as  well  be  non-existent.  It  is  as  if  on  some  par- 
ticular day  he  had  locked  up  a  large  amount  of  reserve  money  in  his 
safe  and  handed  the  key  to  the  Government.  No  matter  how  much  money 
he  might  have  there,  he  might  be  compelled  to  stop  payment  and  be 
ruined,  because  he  could  not  meet  demands  out  of  the  remainder. 

This  is  exactly  the  position  in  which  the  American  system  places  every 
bank.  It  ordains  that  a  certain  percentage  of  the  liabilities  of  the  bank 
must  be  kept  in  cash,  or  in  the  equivalent  of  cash.  This  legal  percentage 
is  undoubtedly  a  reasonable  amount;  such,  in  fact,  as  prudent  bankers 
•M'ould  seek  to  have  on  hand  in  the  ordinary  course  of  business.  But  it  is 
evident  that,  when  the  law  orders  a  banker  to  keep  this  amount  of  money 
by  him,  that  amount  is  withdrawn  from  his  use  for  meeting  demands 
upon  him.  No  matter  what  demands  are  made  upon  him  in  the  course  of 
a  day's  business,  he  cannot,  if  he  obeys  the  law,  touch  that  portion  of  his 
cash  reserves  to  meet  them.  It  is  as  if,  in  military  matters,  the  law  or- 
dained that  every  general  must  keep  twenty  per  cent,  of  his  army  in  re- 
serve, and  forbade  him  to  use  that  part  of  his  force  when  a  battle  is 
going  on. 

But  no  General,  if  the  exigencies  of  an  engagement  were  imminent, 
could  help  bringing  his  reserves  into  play  to  prevent  defeat.  Self-preser- 
vation is  the  first  law  of  nature.  No  statute  law  can  override  it.  The 
position  of  a  banker  under  a  law  of  tliis  description  is  of  a  similar  char- 
acter. In  the  demands  of  his  customers  he  has  a  daily  battle  with  cir- 
cumstances. These  demands  must  be  met  with  money  on  the  spot,  or  he 
is  defeated  and  disgraced  as  a   banker. 

Thus,  then  it  has  come  to  pass,  under  the  pressure  of  circumstances, 
in  times  of  monetary  scarcity,  that  American  bankers  have  found  them- 
selves face  to  face  with  the  problem,  shall  they  use  their  monetary  re- 
serve to  fulfill  the  contracts  made  with  their  customers,  or  shall  they 
comply  strictly  with  the  law  and  refuse  to  pay  their  customers  the  money 
demanded.  It  is  evident  that  when  in  this  position  the  banker  is  in  the 
presence   of   two   conflicting  laws.      On  the   one   hand   is   the   law  which 


272  BANKING    x\ND    COMMErXE. 

obliges  him  to  fulfill  the  contract  made  with  customers,  on  the  other  is  the 
statutory  requirement  that  forbids  him  to  touch  his  store  of  money  when 
it  has  run  down  to  a  certain  sum.  Placed  thus  between  two  contradictory 
requirements,  it  does  not  need  much  penetration  to  see  what  a  banker's 
choice  will  be.  The  law  of  self-preservation,  combined  with  the  funda- 
mental law  of  the  inviolability  of  contracts,  will  lead  him  to  pay  the  de- 
mands of  the  customers,  though  by  so  doing  he  violates  the  provisions  of 
the  statute  law  of  banking. 

This  forecast  of  what  would  be  likely  to  be  done  has  been  demon- 
strated to  be  correct  by  evperience.  Again  and  again  have  American 
banks  kept  on  fulfilling  their  contracts  with  depositors,  although  the 
store  of  money  required  by  law  has  gone  below  the  limit.  In  such  a  pub- 
lic manner  has  this  been  done  that  it  has  been  regularly  published  in 
financial  journals.  When  these  papers  are  publishing  the  condition,  say, 
of  the  banks  of  New  York  city,  they  are  in  the  habit  of  giving  the  fig- 
ures of  the  monetary  reserve  as  being  jip  to  legal  requirements,  or  above 
them,  or  below  them.  Now,  in  the  latter  case  they  publish  the  fact  that 
the  banks  have  violated  the  law.  This  has  repeatedly  been  done  during 
the  last  thirty  years,  yet  neither  the  Government,  nor  the  public,  nor 
banks  in  dealing  with  one  another,  have  taken  the  least  notice  of  it,  ex- 
cept as  an  indication  that  money  is  scarce.  It  is  for  these  reasons  that 
Canadian  bankers  have  invariably  resisted  any  attempt  to  incorporate 
such  a  provision  in  the  banking  law  of  the  Dominion,  although,  under 
pressure  from  doctrinaires  and  theorists,  the  Government  has  sometimes 
endeavored  to  effect  it  when  the  renewal  of  charters  was  under  considera- 
tion. 

Closely  allied  with  the  requirement  of  a  minimum  money  reserve,  is 
that  of  a  system  of  Bank  Examination.  This  system  probably  had  for 
its  foundation  not  so  much  the  determination  whether  a  bank's  business 
was  being  conducted  safely,  as  whether  it  was  complying  with  the  law  in 
the  matter  of  reserves.  This  necessitates  an  inspection  somewhat  of  the 
same  character  as  is  given  to  the  branches  of  banks  in  Canada,  viz.,  a 
verification  of  the  liabilities  and  assets  of  the  office,  not  merely  by  a 
balancing  of  books,  but  by  an  actual  counting  of  money  and  examination 
of  bills  and  documents.  The  examination  of  an  American  bank,  however, 
especially  in  large  cities,  is  now  carried  beyond  this,  and  embraces  pass- 
ing judgment  upon  the  loans  and  discounts  of  the  office.  And  when  the 
examiner  is  a  man  of  capacity,  and  has  learned  by  practice  how  to  bring 
his  experience  to  bear  upon  current  transactions,  his  visit  is  often  found 
to  be  highly  beneficial.  But  experience  has  proved  that  the  examination 
is  in  some  cases  of  a  perfunctory  nature,  doing  neither  good  nor  harm. 
There  have  been  instances  in  which,  only  a  short  time  after  an  examiner's 
verification,  a  bank  has  been  found  to  be  utterly  bankrupt.  Further, 
when  the  examiner  was  a  strong-headed,  opinionated  man,  whose  knowl- 
edge of  business  was  in  inverse  proportion  to  his  conceit,  his  visit  would 


AMERICAN    BANKING.  273 

be  productive  of  harm.  For  he  would  find  fault  with  transactions  that 
were  sound,  and  pass  by  others  that  were  dangerous. 

The  examinations  of  the  banks  in  the  large  cities,  in  New  York  espec- 
ially, are  well  and  carefully  done,  as  a  rule.  Though  the  post  is  a  politi- 
cal one,  and  therefore  liable  to  changes,  the  Government,  as  a  rule,  takes 
care  that  men  of  intelligence  and  experience  are  appointed.  An  intelli- 
gent examiner  will  give  the  banker  the  benefit  of  his  judgment  as  to  the 
soundness  of  his  discounts,  and  sometimes  a  hint  that  the  paper  of  sucli 
and  such  a  house  was  to  be  found  in  other  banks,  thus  jiutting  a  president 
or  cashier  on  his  guard.  The  examiner's  duty  also  embraces  the  overdue 
loans  and  bills  of  the  office,  with  the  securities  held  therefor;  and  it  is 
his  business  to  see  that  proper  provision  is  made  for  such  as  are  doubtful, 
and  that  such  as  are  bad  are  written  off.  Securities  in  the  shape  of 
mortgages,  properties,  and  claims,  also  bonds,  stocks  and  guarantees  are 
examined  with  a  view  to  ascertain  whether  they  stand  at  a  proper  amount 
in  the  bank's  books.  And  when  the  examination  is  completed,  a  report  is 
made  to  the  Comptroller  of  the  Currency  in  Washington,  who  passes  the 
wliole  under  review,  and  sometimes  corresponds  with  the  banks  on  points 
that  seem  to  require  it. 

This  examination  of  the  American  banks  is  another  of  the  points 
sometimes  put  forward  by  theorists  as  desirable  to  be  applied  to  Canada. 
But  this  is  in  evident  ignorance  of  the  difference  in  circumstances.  To 
examine  properly  a  single  large  office  of  a  Canadian  bank,  doing  a  large 
business,  is  a  laborious  matter,  occupying  the  time  of  several  officials  for 
three  or  four  weeks,  and  entailing  in  addition  a  large  amount  of  supple- 
mental office  work  to  bring  all  the  threads  to  a  point.  But  when  a  bank 
has  branches,  as  nearly  every  Canadian  bank  has,  the  examination  of  any 
one  of  its  offices  is  not  an  examination  of  the  bank,  for  the  bank  exists 
with  all  its  powers  of  creating  liabilities  and  investing  in  assets,  in  ten, 
twenty,  or  even  a  hundred  places  at  once;  all  of  Avhich  must  be  examined 
on  the  very  same  day,  if  the  truth  of  its  published  statement  is  to  be  veri- 
fied. For  example,  the  first  column  in  the  monthly  statement  made  by 
Canadian  banks  to  the  Government  gives  the  amount  of  their  note  cir- 
culation. This  amount  is  ascertained  by  deducting  the  total  of  its  own 
notes  held  by  a  bank  on  a  given  day  from  the  total  that  has  been  signed 
and  entered  in  its  books.  But  those  notes  are  held  in  forty,  fifty  or  more 
separate  offices,  and  the  amount  varies  every  day.  They  must  be  counted 
simultaneously  therefore  at  the  close  of  the  same  day,  in  every  one  of  the 
offices.  To  do  this  so  as  to  make  a  complete  check  would  require  the  em- 
ployment of  a  hundred  men  at  least.  But  this  would  be  only  the  begin- 
ning. The  whole  of  the  rest  of  the  cash  would  require  to  be  counted  on 
the  same  day,  and  on  the  same  day  also  the  vast  volume  of  bills  dis- 
counted wculd  require  to  be  examined  at  every  one  of  the  offices.  The 
deposit  ledger  must  also  be  simultaneously  balanced,  the  general  ledger 
also,  the  bills  for  collection  verified,  the  accounts  with  other  banks  at 
home  and  abroad  checked  over,  and  an  enormous  mass  of  verifying  cor- 
18 


274  BAXKIXG    AND    COMMERCE, 

respondcnce  entered  upon,  the  results  of  which  would  require  to  be  waited 
for  before  the  examination  could  be  said  to  be  complete.  To  carry  out 
all  this  efficiently  in  the  case  of  any  one  of  the  large  banks  two  himdred 
men  at  least  would  be  required.  Yet  the  examination  even  then  would 
only  have  embraced  one  bank.  Now,  considering  the  number  of  banks 
in  the  Dominion,  and  the  number  of  their  branches,  some  of  them  in  the 
United  States,  the  West  Indies  and  Great  Britain,  it  is  not  too  much  to 
say  that  to  do  the  work  effectually  would  require  the  creation  of  an 
enormous  Government  department  with  at  least  a  thousand  trained  of- 
ficers. To  do  che  work  in  any  other  way  would  be  delusive  and  mis- 
chievous, Th'  above  statement  should  demonstrate  the  impossibility  of 
the  project. 

Stockholders  Meetings  in   Canada  and  the  United  States, 

Another  feature  of  American  banking  and  one  in  which  it  differs  in 
a  marked  degree  from  that  of  Great  Britain  and  Canada  is,  that  its  bank- 
ing corporations,  apart  from  the  returns  they  make  to  the  Government, 
scarcely  ever  come  before  the  general  public.  The  annual  meeting  of 
the  stockholders  of  one  of  the  larger  banks  in  Great  Britain  or  Canada 
is  an  event  of  interest  to  the  whole  community.  Reporters  are  generally 
present,  remarks  and  comments  are  made  by  the  president,  and  often  by 
the  chief  executive  officer,  in  which  there  is  sometimes  a  review  not  only 
of  the  business  of  the  bank,  but  of  the  financial  and  commercial  position 
of  the  country.  This  is  specially  the  case  in  Canada,  Questions  are 
asked  by  stockholders  as  to  points  in  the  annual  statement,  or  as  to  profits 
or  losses,  and  it  is  common  both  in  Great  Britain  and  Canada  for  stock- 
holders to  make  remarks  and  criticisms.  And  when  legislation  is  being 
brought  forward  on  the  subject,  either  in  the  Provincial  or  Dominion 
legislatures,  the  opinions  of  bankers  are  generally  asked  for  and  great 
weight  attached  to  their  answers. 

But  as  a  rule  nothing  of  the  kind  is  known  in  the  United  States,  Un- 
less something  extraordinary  is  taking  place,  the  newspapers  take  no 
notice  of  the  annual  meetings  of  banks,  and  as  to  admitting  reporters, 
they  would  as  soon  be  allowed  to  attend  the  weekly  meetings  of  the  board 
of  directors.  The  banks  are  looked  upon  almost  as  private  partnerships, 
so  far  as  their  individual  action  is  concerned;  the  only  notice  taken  of 
them  is  in  their  associated  capacity,  when  their  public  statements  are 
noted  and  commented  upon  purely  in  their  bearing  on  the  money  market. 
As  to  their  action  as  bearing  on  trade  or  commerce  it  is  rarely  thought  of. 
Nor  is  it  as  bearing  upon  legislation. 

The  Annual  Meetings  of  the  Bankers'  Associations,  both  of  the  sepa- 
rate States,  and  of  the  country  as  a  wliole.  are  the  only  occasions  on  which 
the  larger  questions  are  discussed  which  are  common  to  all  banks  and 
which  relate  to  banking  as  a  profession.  There,  however,  they  are  dis- 
cussed with  marked  ability.     The  purely  local  character  even  of  the  larg- 


AMERICAN    BANKING.  '275 

est  American  banks  is  doubtless  the  reason  for  all  this,  which,  it  should 
be  borne  in  mind,  has  not  arisen  from  legislation,  but  has  been  simply  a 
growth  of  custom.  ' 

Officers  of  Ameuican  Banks. 

There  are  certain  particulars  in  which  the  internal  economy  of  Ameri- 
can banks  is  different  from  that  prevailing  in  Great  Britain  and  Canada. 
The  most  important  of  these  is  in  the  position  occupied  bj'^  the  president. 
The  president  of  an  American  bank  is,  as  a  matter  of  course,  a  member 
of  the  board  of  directors,  and  subject  like  the  rest  to  an  annual  election. 
And  he  is,  by  the  very  nature  of  his  office,  the  chairman  of  the  board. 
But  in  addition  to  this,  he,  in  many  cases,  is  the  manager  and  chief  ex- 
ecutive officer  of  the  corporation,  and  as  such  gives  daily  attendance,  re- 
ceives customers,  arranges  loans,  discounts  bills,  opens  or  closes  ac- 
counts, and  appoints  and  supervises  the  staff  of  the  bank.  He  has  had 
almost  invariably  a  training  in  the  business  of  banking  from  the  outset. 
He  is  thus  able  to  perform  with  intelligence  all  the  fimctions  of  the 
general  manager  of  an  English  or  Canadian  bank.  In  the  smaller  banks 
of  the  United  States,  the  duties  of  even  a  Canadian  branch  manager  ap- 
pertain to  him.  There  are  undoubtedly  some  advantages  in  this  system, 
for  the  })resident  being  the  chairman  of  the  board  of  directors  is  able 
with  perfect  knowledge  and  with  the  weight  of  authority  to  carry  out 
their  policy  in  the  bank's  daily  administration. 

This  ensures  that  there  shall  be  no  conflict  between  the  chief  executive 
officer  and  the  board,  and  that,  in  case  of  difference  of  opinion,  the  views 
of  directors  shall  prevail.  It  carries  also  the  great  advantage  that  in  the 
board  itself  there  shall  be  one  who  is  perfectly  conversant  with  matters 
from  a  banking  point  of  view;  a  professional  banker,  in  fact,  whose  in- 
formation is  varied,  and  his  judgment  sharpened  by  daily  contact  with 
customers  and  the  public.  Reasons  like  these  have  prevailed  when  on  sev- 
eral occasions  the  general  manager  of  a  Canadian  bank  has  been  elected 
to  the  office  of  president,  continuing  nevertheless  to  exercise  the  same 
functions  as  before. 

There  are,  however,  disadvantages  in  the  system.  It  is  undoubtedly 
desirable  that  the  chairman  of  the  board  of  directors  and  the  principal 
person  amongst  them,  should  be  a  man  of  wealth  and  importance  in  the 
community,  apart  from  his  connection  with  the  bank.  This  it  is  scarcely 
likely  that  any  officer  of  a  bank  could  be.  Moreover,  it  is  certainly  unde- 
sirable that  the  principal  executive  officer  of  a  bank  should  be  subject  to 
an  annual  election,  the  continuity  of  the  same  person  in  such  an  office 
being  a  matter  of  importance.  The  carrying  out  of  this  system  of  mak- 
ing the  president  the  chief  executive  officer  involves  also  the  making  the 
office  of  cashier  a  position  of  secondary  importance.  He  therefore  has 
duties  which  though   important  are  subordinate.      His   position  in   effect 


276  BANKING    AND    COMMERCE. 

is   analogous   to   that   of  assistant  manager   in   an   English   or   Canadian 
bank."'^ 

Certification   of   Checks. 

Anotlier  peculiarity  of  American  banking,  especially  in  the  large 
cities,  is  the  function  exercised  by  the  paying  teller  of  certifying  checks 
as  "good."  The  exercise  of  this  function  by  an  officer  who  does  not  keep 
the  accounts  of  customers,  and  docs  not  charge  such  checks  to  account 
when  certifying  them,  is  somewhat  of  an  anomaly,  and  seems  to  open  the 
way  to  constant  mistakes.  For  in  a  bank  with  a  large  number  of  accounts 
it  seems  impossible  for  a  teller  to  recollect  with  sufficient  accuracy  the 
position  of  every  account  to  make  it  safe  for  him  to  certify  that  checks 
are  good.  Experience,  however,  seems  to  justify  the  practice,  and  it  is 
well  known  that  the  tellers  of  many  English  banks  pay  checks  across 
the  counter  without  any  certification  at  all.  Some  banks  in  the  North  of 
England  have  adopted  the  practice  of  certification.  But  in  their  case 
the  certifying  officer  is  the  person  who  keeps  the  account  in  the  ledger, 
which  is  the  more  reasonable  and  safe  practice.  This  is  the  case  in 
Canada,  and  it  is  carried  out  with  accuracy  and  precision  there  by  charg- 
ing the  account  of  a  customer  with  every  check  that  is  certified. 

Altogether  the  system  of  banking  carried  out  in  the  States  is  evi- 
dently adapted  to  the  requirements  of  the  country.  The  division  into 
national  banks  and  state  banks  arises,  naturally  from  the  circumstances 
under  which  the  states  of  the  Union  came  to  be  at  once  separate  and 
united.  Both  classes  of  banks  are  precisely  the  same  in  their  internal 
economy.  The  want  of  elasticity,  however,  is  a  great  drawback  to  the 
national  currency,  as  has  been  observed,  and  efforts  have  been  made  at 
various  times  to  cure  this  defect,  which  could  be  accomplished  by  the 
adoption  of  a  system  analogous  to  that  of  Canada.  But  the  jealousy  of 
banking  corporations  entertained  by  large  multitudes  of  the  people,  es- 
pecially of  the  Western  States,  has  hitherto  prevented  any  legislation  in 
that  direction;  in  fact,  instead  of  turning  their  attention  to  such  a  prac- 
tical matter  as  this,  multitudes  of  the  people  have  been  misled  into  the 
advocacy  of  such  a  will-o'-the-wisp  as  the  establishment  of  silver  on  an 
utterly  impracticable  and  dishonest  basis.  This  dangerous  delusion  has 
only  been  dispelled  by  the  setting  in,  of  late  years,  of  a  tide  of  prosperity 
over  every  part  of  the  country  and  of  every  interest  in  it. 

The  interference  by  government  in  such  a  delicate  matter  of  bank  ad- 
ministration as  the  monetary  reserve,  and  also  the  system  of  bank  exami- 
nations under  the  supervision  of  a  government  bureau,  are  instances  of 

73  In  the  early  days  of  Canadian  banking,  and  tliere  is  a  survival  of  this 
system  yet  in  some  quarters,  the  chief  executive  officer  of  the  bank,  even  when 
it  had  many  branches,  was  called  "cashier,"  instead  of  manager  or  general 
manager.  But  his  functions  were  the  same  as  those  of  the  president  of  an 
American  bank,  and  not  of  its  cashier.  The  title  of  "cashier"  is  also  used  of 
the  chief  executive  officer  in  some  Scotch  banks,  as  is  the  case  also  In  the  Bank 
of  England.  It  is  well  known  also  that  the  officers  who  are  called  "tellers"  in 
Scotland,    are    called    "cashiers"    in    England. 


AMERICAN    BANKING.  277 

what  is  a  remarkable  feature  in  administration  in  the  United  States,  viz., 
the  extent  to  which  the  powers  of  government  are  stretched.  Such  gov- 
ernmental interference  is  entirely  \inknown  in  the  banks  of  England  and 
Scotland,  and  it  would  never  be  tolerated  if  attempted.  The  same  remark 
may  also  be  applied  to  Canada. 

One  final  word  may  be  said  as  to  the  manner  in  which  the  Associated 
banks  of  New  York  are  accustomed  to  act  together  for  mutual  protection 
in  times  of  financial  stress.  Again  and  again,  they  have  combined  their 
reserves,  the  strong  protecting  the  weak,  and  this  with  so  much  wisdom 
that  no  danger  has  been  incurred,  and  no  undesirable  consequences  have 
followed.  The  Clearing-House  of  New  York,  which  has  supplied  the 
machinery  for  this  united  action,  is  beyond  doubt  one  of  the  best,  if  not 
the  best,  managed  institutions  of  the  kind  in  the  world. 


CHAPTER   XXXI r. 

VARIOUS  THEORIES  OF  NOTE  CIRCULATION. 

Government  Note  Issues — Government  Bonds  as  Security  for 
Bank  Notes — Issues  of  the  Bank  of  England — Basis  of  Canada's 
Bank  Note  Circ'tlation — How  Elasticity  is  Secured. 

AMONGST  the  various  theories  that     have  prevailed  on  this  impor- 
±\.     tant  subject,  the  following  have  been  the  most  important: 

First. — That  all  promissory  notes  designed  to  pass  as  money 
should  be  issued  by  the  Government  of  the  country  in  which  they  are  in- 
tended to  circulate. 

Second. — That  all  circulating  notes  shall  be  issued  under  Government 
supervision,  and  be  strictly  secured  by  Government  bonds. 

Third. — That  circulating  notes  may  be  issued  by  banks  chartered  by 
subordinate  legislatures,  and  secured  by  bonds  issued  under  .authority  of 
those  legislatures,  or  by  bonds  of  railways,  or  municipalities. 

Fourth. — That  circulating  notes  shall  be  issued  by  a  central  banking 
corporation  having  exclusive  dealings  with  the  Government,  such  notes 
being  secured  in  part  by  the  bonds  of  the  Government,  the  whole  of  the 
remainder  being  secured  by  gold  exclusively  set  apart  in  a  department 
for  the  purpose,  and  all  would  be  legal  tender. 

Fifth. — That  notes  may  be  issued  by  banks  without  any  restriction, 
and  subject  only  to  the  check  imposed  by  daily  redemption. 

Si.rth. — That  bank  notes  may  be  issued  by  banks  duly  registered  as 
such,  having  circulating  powers  to  a  certain  amount  fixed  by  law;  and,  in 
some  cases,  to  an  amount  over  and  above  this  sum,  provided  that  gold  is 
held  for  the  excess. 

Seventh. — That  banks  duly  organized  under  a  general  act,  and  sub- 
ject to  the  provisions  of  such  act,  shall  issue  notes  to  the  extent  of  theii* 
paid-up  capital;  such  notes  being  by  law  a  first  lieji  upon  all  the  assets 
and  resources  of  the  bank,  and  further  secured  by  deposits  of  money 
with  the  Government  as  a  special  redemption  fund. 

All  these  systems  have  been  tried  in  actual  practice  at  one  time  or  at 
another  time,  in  one  country  or  another  country.  Some  of  them  have 
been  found,  after  experience,  utterly  wanting,  and  no  longer  exist,  such 
as  the  Third  and  Fifth.  Others  of  them  exist  at  the  present  day  and 
furnish  the  circulating  media  of  various  countries  in  which  they  are  es- 
tablished. 

It  is  proposed  to  consider  these  systems  in  their  order. 

Government    Note    Issues. 

The  first  theory,  namely,  that  the  Government  of  the  country  should 
be  the  only  medium  for  the  issue  of  circulating  notes  was  thoroughly  dis- 

278 


VARIOUS  THEORIES  OF   NOTE   CIRCULATION.         279 

cussed  in  Canada  both  by  the  press  and*  in  Parliament  about  the  year 
1866,  when,  under  the  auspices  of  the  Finance  Minister  of  the  day,  it 
was  proposed  to  abolish  the  issue  of  notes  by  the  banks  and  to  substitute 
for  them  the  notes  of  the  Government. 

The  banks  of  the  country,  with  one  exception,  were  opposed  to  the 
Government  assuming  this  function.  Amongst  other  things,  they  stated 
that  it  would  be  impossible  to  put  an  efficient  check  upon  over-issues  by 
the  Government,  should  pressing  necessities  arise,  for  with  every  Govern- 
ment the  law  of  self-preservation  is  paramount,  and  would  override  all 
other  considerations. 

Second,  that  such  issues,  if  continued,  would  inevitably  depreciate  the 
value  of  the  bills  and  unsettle  every  financial  interest  of  the  country. 

At  the  very  time  when  this  theory  was  propounded  in  Canada,  the 
notes  of  the  Government  of  the  United  States  were  at  a  heavy  discount. 
(It  may  be  added  that  eleven  years  elapsed  before  they  were  worth  par.) 
It  was  pointed  out  that  repeated  experience  had  shown  that  there  was  no 
limit  to  the  dej^reciation  of  Government  notes;  that  every  Government 
currency  then  circulating  in  the  world  was  at  a  discount,  Italy  and  Russia 
being  cited  as  examples;  that  such  currencies  in  former  days,  though 
issued  by  governments  which  had  proved  perfectly  stable  in  other  re- 
spects, had  fallen  to  such  a  discount  as  to  be  practically  worthless. 

Finally,  the  broad  ground  was  taken  that,  though  it  was  the  un- 
doubted function  of  the  Government  to  stamp  coin,  and  give  authority 
to  issue  notes,  the  function  of  redemption  was  one  that  peculiarly  per- 
tained to  bankers;  that  nothing  is  more  easy  than  to  issue  bills;  nothing 
more  difficult  than  to  maintain  constant  redemption  of  them.  Moreover, 
the  issuing  of  circulating  bills  should  be,  and  would  be,  if  healthy, 
closely  connected  with  the  daily  operations  of  commerce,  which  is  not  in 
the  sphere  of  government  but  of  banking.  It  was  pointed  out  that  a 
government  as  a  borrower  of  money  is,  in  many  respects,  in  the  same 
position  as  an  individual,  or  an  ordinary  corporation;  that  there  is  no 
charm  about  the  organization  called  a  government  to  make  it  safe  under 
all  circumstances;  that  a  government  may  fail  to  meet  its  obligations, 
may  compound  with  its  creditors,  and  may  actually  compound  on  the 
composition,  as  Spain  has  done.  A  government,  it  was  said,  may  re- 
pudiate its  obligations  altogether  (as  has  been  actually  the  case),  and 
may  have  its  obligations  protested  by  millions,  and  not  make  the  slightest 
effort  to  pay  them. 

Such  were  the  reasons  which  had  weight  with  the  bankers  and  people 
of  Canada  at  the  time  named,  and  induced  them  to  organize  opposition 
to  the  project  of  having  all  circulating  bills  issued  by  the  Government  of 
the  day. 

It  is  true  that  subsequently  in  Canada  an  act  of  Parliament  was 
passed,  authorizing  the  Government  to  issue  one  and  two  dollar  bills  for 
circulation,  and  also  bills  of  large  denominations  not  for  circulation,  but 
for  the  convenience  of  the  banks  in  making  settlements  with  each  other; 


280  E-VXKIXG    AND    COMMERCE. 

one  provision  of  tlie  act  being  that  the  banks  should  hold  a  certain  per- 
centage of  their  cash  reserves  in  these  notes.  To  this  the}'  submitted, 
seeing  that  the  act  required  the  Government  to  hold  a  large  percentage 
of  its  issues  in  actual  gold,  and,  in  addition,  to  hold  authorized  debentures 
for  the  balance.  This  system  is  precisely  that  of  the  Bank  of  England. 
And  to  say  truth,  none  of  the  dangers  which  were  considered  to  be  bound 
up  with  issues  of  the  Government  have  transpired  so  far.  Respecting 
this,  however,  two  observations  have  to  be  made:  first,  that  the  system  of 
Government  issues  in  Canada  for  circulation  is  only  a  very  partial  one; 
and,  secondly,  that  at  times  when  large  notes  were  presented  for  redemp- 
tion by  banks  that  needed  gold  for  export,  the  bankers  of  the  Government 
were  willing  to  assist  in  meeting  the  demand.  The  system,  indeed  has 
never  been  very  severely  tried. 

With  regard  to  the  United  States,  it  is  an  undoubted  fact  that  since 
the  Federal  Government  resumed  payment  in  specie — and  it  was  more 
than  twelve  years  after  the  war  terminated  that  they  did  so — none  of  the 
evils  foreshadowed  in  Canada  as  a  consequence  of  Government  issues 
have  transpired.  But  it  has  to  be  said  again,  that  the  system  of  Govern- 
ment issues  since  the  war  has  never  been  severely  tested,  and  also  that 
the  Government,  during  the  whole  period,  has  been  its  own  banker;  al- 
ways having  stores  of  gold  in  possession,  the  product  of  over-sufficient 
taxes. 

Moreover,  whatever  evils  might  be  developed  by  a  system  under 
which  the  Government  would  be  the  sole  issuer  of  circulating  notes,  such 
would,  even  under  pressure,  be  much  lessened  when  supplemented  by  a 
system  of  bank  issues,  as  has  been  the  case  in  the  United  States. 

Had  the  agitation  for  a  silver  basis  for  Government  issues  been  suc- 
cessful (and  this  momentous  question,  at  one  time,  wholly  depended  on 
the  uncertain  issue  of  a  Presidential  election)  it  is  certain  that  in  such 
an  event  gold  would  have  gone  to  a  considerable  premium,  and  the  notes 
of  the  Government  to  a  heavy  discount.  The  trend  of  opinion,  even  in 
the  United  States,  is  in  the  direction  of  gradually  withdrawing  Govern- 
ment notes  from  actual  circulation,  and  confining  them  to  the  issue  of 
such  gold  certificates  as  are  in  use  now  in  the  larger  centres,  exchange- 
able for  gold  at  the  pleasure  of  the  holder.  But  the  idea  of  the  whole 
issues  of  a  country  being  that  of  the  Government  loses  favor  when  ex- 
amined in  the  light  of  events;  and  for  this  reason  especially,  if  none 
others  could  be  alleged,  such  issues  cannot  possibly  correspond  to 
the  movements  and  requirements  of  commerce. 

Bank  Notes  Secured  by  Government  Bonds. 

The  second  theory  is  that  which  prevails  in  the  United  States  under 
the  National  Bank  Act.  Under  this  system  all  bank  issues  are  secured 
by  Government  bonds.  They  are  absolutely  restricted  to  a  certain  per- 
centage of  the  capital  of  each  issuing  bank;  the  total  amount  cannot  be 
increased  except  by  the  establishment  of  new  banks,  there  being  no  in- 


VARIOUS   THEORIES   OF    NOTE   CIRCULATION.         281 

ducemcnt  for  existing  banks  to  increase  tlieir  cajjital  for  tlie  purpose  of 
increased  circulation. 

Under  this  system,  while  the  notes  are  perfectly  secure  so  long  as 
the  bonds  of  the  Government  are  good,  they  would  depreciate  if  the  bonds 
depreciated.  Moreover,  this  system,  like  that  of  Government  notes,  has 
no  correspondence  with  the  inflowing  and  outflowing  movements  of  com- 
merce. The  notes  are  never  presented  for  redemption.  They  are  far  in 
excess  of  ordinary  requirements  at  one  time,  and  far  below  such  require- 
ments at  anotlier;  the  result  being  those  heavy  fluctuations  in  the  rate  of 
interest  which  have  always  distinguished  the  New  York  money  market, 
and  which  bring  about  periodically  severe  financial  crises. 

The  system,  in  its  practical  working,  often  leads  to  such  a  scarcity 
of  currency  in  rural  districts  that  business  is  almost  reduced  to  a  condi- 
tion of  barter.  ^Nloved  by  conditions  such  as  these,  strenuous  endeavors 
have  been  made  in  the  United  States  to  bring  about  such  modifications  of 
the  system  as  would  ensure  elasticity  as  well  as  security. 

The  third  system  prevailed  in  the  United  States  before  the  establish- 
ment of  the  national  bank  system;  but  its  defects  were  so  great,  and 
its  abuses  so  constant,  that  it  was  abolished  at  the  beginning  of  the 
Civil  War  without  any  resistance,  and  has  never  since  sought  to  be  re- 
habilitated. 

Issues  of  the  Bank  of  England. 

The  fourth  is  the  system  of  the  Bank  of  England.  The  notes 
of  the  Bank  of  England  are  legal  tenders  everywhere  in  England  ex- 
cept at  the  counters  of  the  Bank,  where  they  are  interchangeable  for 
gold.  For  many  generations,  and  up  to  the  passing  of  Sir  Robert 
Peel's  Act,  there  was  no  statutory  limit  to  the  issue  of  the  Bank  of  Eng- 
land notes.  But  there  was  a  constant  and  never-ceasing  restriction  upon 
such  issues  by  the  necessity  of  redeeming  them  in  gold.  This  restriction, 
however,  ceased  to  operate  during  the  period  of  the  French  Revolution- 
ary War.  Specie  payments  were  then  suspended  and.  not  resumed 
until  some  years  after  the  war  had  closed. 

At  that  time,  as  might  be  expected,  gold  went  to  a  premium,  which 
premium  was  disguised  under  the  price  per  ounce  of  gold  bullion; 
wliicli  was  much  higher  when  paid  for  in  Bank  of  England  notes  than  in 
gold  coin.  Tlie  discussions  that  took  place  in  Parliament  at  this  period 
with  regard  to  the  Bank  of  England  issues  and  the  price  of  gold  dis- 
play a  most  remarkable  want  of  apprehension  of  the  real  bearings  of 
the  question  on  the  part  of  eminent  statesmen  and  members  of  Parliament. 
Although  for  years  it  was  patent  that  a  certain  number  of  pounds  of  Bank 
of  England  notes  would  not  buy  nearly  the  same  amount  of  commodities 
as  the  same  amount  of  money  in  gold  coin,  it  was  strenuously  denied 
by  certain  thinkers  that  the  notes  were  at  a  discount.  This  might  be 
deemed  incredible,  if  the  fact  were  not  so  well  established.  The  premium, 
indeed,  was  never  high;  not  more  than  fifteen  or  sixteen  per  cent.,  but 
guineas,  which  were  the  standard  gold  coin  at  the  time,  were  perfectly 


282  BANKING    AND    COMMERCE. 

well    known    to    be    worth    about    that    much   beyond    Bank    of    England 
notes. '^ 

But  although  si)ecie  payments  were  suspended,  the  supply  of  gold 
and  silver  in  the  country  was  jealously  watched,  and  constant  spasms 
of  uneasiness  passed  over  it,  when,  under  Mr.  Pitt's  policy,  heavy  drains 
of  specie  took  place  for  shipment  to  the  Continent  to  subsidize  the  gov- 
ernments fighting  against  Napoleon. 

Tlic  amount  of  discussion  that  took  place  on  the  subject  of  Bank  of 
England  notes  up  to  the  time  of  the  passing  of  Sir  Robert  Peel's  Act 
was  simply  enormous;  but  there  scarcely  appears  during  the  whole  of 
it  a  proper  appreciation  of  the  undoubted  fact  that  it  was  these  abnormal 
drains  of  gold  tliat  brought  about  the  unusual  condition  that  prevailed. 
Gold  was  at  a  premium:  that  was  a  solid  fact,  deny  it  who  would;  but 
no  one  seems  to  have  imagined  what  was  the  true  cause  of  it,  namely, 
that  gold  was  in  abnormal  demand  for  ptirposes  entirely  unconnected 
with  the  ordinary  operations  of  trade  or  finance.  It  is  perfectly  evident 
to  us,  who  had  the  experience  of  gold  rising  to  a  premium  during  the 
American  Civil  War,  that  if  there  had  been  no  war  with  Napoleon,  gold 
would  never  have  risen  to  a  premium,  and  that  Bank  of  England  notes, 
and  all  other  paper  money  with  them,  would  never  have  fallen  to  a  dis- 
count. 

This  was  the  truth,  however,  that  had  to  be  learned  by  experience ;  for 
when  war  ceased,  and  the  movements  of  finance  became  natural,  gold 
gradually  accumulated,  and  it  became  possible  to  resume  payments  in 
specie.  The  convertibility  of  the  note  had  once  more  become  a  patent 
fact  long  before  the  passing  of  Sir  Robert  Peel's  Act  which  was  meant 
to  ensure  it. 

But  after  the  great  panic  of  1825  (brought  about  by  extravagant 
speculations  in  foreign  stocks,  and  the  numerous  failures  of  private  banks 
which  ensued),  an  opinion  began  to  prevail  that  all  revulsions  and  panics 
were  attributable  to  the  over-issue  of  notes  by  country  banks  and  by  the 
Bank  of  England.  That  this  idea  was  fallacious  a  long  course  of  subse- 
quent events  demonstrated.  But  it  took  such  deep  root  in  the  public 
mind  that  at  length,  under  Sir  Robert  Peel,  legislation  was  carried 
through  Parliament  with  regard  to  it. 

The  object  of  Sir  Robert  Peel  and  the  party  that  acted  with  him 
was  to  abolish  all  issues  throughout  the  Kingdom  except  the  issues  of  the 
Bank  of  England;  and  further  that  the  issues  of  the  Bank  of  England 
should  be  absolutely  upon  a  gold  basis;  so  that  for  every  five-pound 
note  issued  by  the  Bank  five  sovereigns  should  be  held  to  redeem  it.  The 
theory  was  expressed  in  a  sort  of  formula,  that  bank  notes  should  fluctu- 
ate exactly  as  gold  would  fluctuate  in  case  there  were  no  bank  notes  at  all. 

The  framers  of  this  theory  and  its  upholders  were  not  practical  men, 

74  Had  the  notes  been  Issued  by  the  Government,  It  Is  probable  that  they  would 
have  fallen  to  the  same  extent  as  consols,  viz.,  to  about  fifty  per  cent,  discount. 
Consols  were  at  52  In  1803,  as  may  be  seon  by  a  recent  issue  of  the  London 
"Times." 


VARIOUS   THEORIES   OF   NOTE   CIRCULATION.         283 

and  did  not  see  that  if  tliis  theory  were  thoroughly  carried  out  it  would 
be  far  better  not  to  have  any  bank  notes  at  all.  Why  should  any  cor- 
poration, or  even  any  government,  go  to  the  expense  of  printing  bank 
notes  and  incur  the  risk  of  paying  forged  ones,  if  for  every  note  issued 
there  must  be  a  corresponding  amount  of  gold  in  the  till.''  In  that  case, 
why  not  pay  out  the  gold  at  once.^  Why  not  have  a  simjile  gold  currency, 
and  save  the  risk  and  expense  of  paper  notes.'' 

Under  sueli  a  theory  there  is  no  possible  object  to  be  gained  by  is- 
suing paper  money;  and  it  would  be  obviously  more  profitable  not  to 
use  it.  It  never  seems  to  have  dawned  upon  these  theorists  that  the  very 
foundation  and  raison  d'etre  of  paper  money  is  to  economize  the  use  of 
gold. 

Against  this  reasoning  it  may  be  urged  that  the  bankers  who  were  in 
favor  of  this  currency  measure  were  not  mere  theorists,  but  mostly  Lon- 
don bankers  of  large  experience,  who  thoroughly  understood  the  subject 
they  were  treating  of.  This,  however,  is  a  mistake.  London  bankers 
they  were,  certainly,  and  men  of  the  largest  experience  truly  in  some 
departments  of  banking.  But  it  is  a  simple  fact,  that  in  the  matter  of 
the  issue  and  redemption  of  circulation,  they  had  no  experience  what- 
ever. London  bankers  had  given  up  issuing  their  own  notes  for  nearly 
fiftj'  years.  Not  one  of  them  knew  anything  of  the  subject  by  his  own 
practical  experience;  for  not  one  of  them  in  his  lifetime  had  ever 
issued  or  redeemed  a  single  note  of  his  own. 

In  no  department  of  finance  is  the  maxim  "experlentia  docet"  more 
applicable  than  to  that  of  circulation.  Their  answers,  therefore,  to  the 
voluminous  series  of  questions  put  to  them  were  all  the  speculations  of 
impractical  theorists. 

But  even  with  these,  when  the  idea  was  proposed  to  be  applied  to 
the  Bank  of  England,  and  to  require  that  the  Bank  should  hold  gold  for 
every  note  it  issued,  an  enormous,  and  what  proved  to  be  an  insurmount- 
able obstacle,  loomed  up.  There  was  not  enough  gold  in  the  country  to 
meet  this  requirement.  If  even  an  attempt  had  been  made  to  put  it  in 
operation,  a  tremendous  disturbance  of  business  and  unparalled  tight- 
ness of  money  would  have  ensued.  In  order  to  get  such  an  amount  of 
gold  as  that  into  the  Bank  of  England,  it  would  have  been  necessary  to 
appeal  to  foreign  countries;  for  it  certainly  could  not  have  been  spared 
in  England.  But  it  could  not  have  been  taken  from  foreign  countries  by 
force,  it  could  only  be  got  by  selling  abnormal  amounts  of  consols 
abroad;  or  by  making  forced  sales  of  British  goods. 

But  even  these  resources  would  not  have  availed  to  a  sufficient  ex- 
tent; for  foreign  governments  would  soon  have  put  a  stop  to  the  drain  of 
gold  when  they  saw  what  was  going  on.  It  was  an  absolute  necessity, 
therefore,  for  Sir  Robert  Peel  to  modify  his  theory  to  a  large  extent. 
The  idea  of  compelling  the  Bank  to  hold  gold  for  every  note  it  issued 
was  abandoned;  and,  as  the  Act  finally  passed,  the  governors  were  al- 
lowed to  issue  notes  against  the  debt  owing  to  them  by  the  Government. 


284  BANKING    AND    COMMERCE. 

A  considerable  part  of  its  issues,  therefore,  have  never  been  represented 
by  gold  at  all;  and  the  currency  tlieory  broke  down  from  the  very  moment 
it  was  attemj)ted  to  carry  it  into  practice. 

But  -with  regard  to  the  remainder  of  its  issues.  Sir  Robert  thought 
he  could  contrive  a  machine  which  would  work  automatical!}'  and  ensure 
the  convertibility  of  the  rest  of  the  notes  into  gold  under  all  circum- 
stances; for  under  its  operation  the  circulation  would  flow  out  and  in 
exactly  as  if  it  were  metallic. 

This  machine  was  the  celebrated  device  of  the  separation  of  the  is- 
suing department  of  the  Bank  from  the  banking  department. 

All  the  notes  of  the  Bank  were  to  be  issued  by  the  issuing  depart- 
ment, and  only  in  exchange  for  gold.  Gold  Avas,  of  course,  to  be  given 
for  notes  when  demanded.  The  banking  department  could  not  get  notes 
to  do  business  with  exccjDt  by  handing  gold  to  the  issuing  department. 
Under  this  system  it  was  concluded  that  there  could  be  no  possibility  of 
an  overissue,  and  that  for  the  future  there  would  be  no  more  financial 
panics  and  revulsions. 

But  the  Act  went  much  further  than  to  deal  simply  with  the  circula- 
tion of  the  Bank  of  England.  There  were  large  numbers  of  banks  in 
England  that  regulai-ly  issued  circulating  notes.  Some  of  these  were 
private  banks,  some  of  them  joint  stock.  It  was  intended  by  Sir  Robert 
Peel  to  abolish  the  circulation  of  all  these  banks;  for  they,  like  the  Bank 
of  England,  were  blamed,  though  without  reason,  for  overissuing,  and 
thus  assisting  to  bring  about  panics.  But  these  banks  of  the  country 
made  such  a  strenuous  resistance  to  the  abolition  of  their  notes  that  Sir 
Robert  was  compelled  to  consent  to  a  modification  of  his  scheme.  After 
considerable  discussion,  which  indicated  on  the  part  of  Peel  and  his 
Government  a  singular  want  of  apprehension  of  the  real  bearings  of  the 
subject  (as  contrasted  with  the  views  of  practical  men  like  the  country 
bankers),  a  basis  of  restriction  was  agreed  upon.  The  average  circu- 
lation of  the  preceding  three  years  was  taken,  which  amount  being  duly 
registered,  was  fixed  as  the  limit  beyond  which  the  country  banks  were 
not  to  extend  their  issues  in  future.  Returns  of  the  circulation  of  these 
banks  were  hereafter  to  be  published  in  the  "Gazette,"  and  so  they  have 
been  ever  since,  as  well  as  in  the  London  "Bankers'  Magazine."  It  was 
provided  also  that  in  case  a  bank  discontinued  business,  its  circulating 
powers  must  lapse  to  the  Bank  of  England. 

The  Scotch  banks  made  even  a  more  strenuous  resistance  than  the 
coimtry  banks  of  England,  and  by  their  compactness  and  unity  of  action 
were  able  to  bring  strong  pressure  to  bear  upon  the  Government.  It  was 
finally  agreed  and  embodied  in  law  that  the  Scotch  banks  should  continue 
to  circulate  bills  as  before  to  the  extent  of  the  average  of  the  three  pre- 
ceding years;  but  with  this  important  proviso,  that  they  might  circulate 
to  any  amount  beyond  that,  provided  they  held  gold  to  cover  the  extra 
amount.  On  this  basis  the  issues  of  the  banks  in  Scotland  have  con- 
tinued ever  since. 


I 


VARIOUS  THEORIES  OF   NOTE   CIRCULATION.         285 

In  Scotland,  as  in  Canada,  there  is  always  an  expansion  of  circula- 
tion during  several  months  of  the  year.  At  that  time  it  has  been  the 
custom  of  the  Scotch  banks  to  augment  their  stock  of  gold  by  the  amount 
calculated  to  be  required.  Boxes  of  gold  are  regularly  sent  down  from 
London  to  Scotland  for  the  purpose :  but  it  is  a  well  known  fact  in  bank- 
ing circles  that  the  boxes  are,  as  a  rule,  never  opened,  and  are  returned 
to  London  exactly  aS  they  came  when  the  period  of  expansion  closes. 
It  should  be  remembered,  moreover,  that  the  circulation  of  notes  is  very 
much  larger  in  Scotland  than  in  England  owing  to  the  fact  that  banks 
issue  one  pound  notes."" 

All  this  legislation  took  place  in  the  year  1841,  or  soon  afterwards; 
and  upon  this  basis  the  circulation  of  notes  in  England  and  Scotland 
has  continued  ever  since.  The  notes  of  the  Bank  of  England  are  issued 
to  the  extent  of  its  holding  of  Government  bonds  and  of  its  gold  in 
possession.  The  English  banks  (those  that  circulate  at  all)  issue  up  to 
the  amount  established  by  law.  The  Scotch  banks  to  this  latter  amount 
with  the  addition  of  gold  in  hand  to  the  excess. 

But  it  is  to  be  noted  that  the  question  of  securing  note  issues  seems 
to  have  been  considered  quite  subordinate  in  importance  to  that  of  pre- 
venting what  were  thought  to  be  overissues.  As  a  matter  of  fact,  the 
only  notes  of  the  Bank  of  England  that  are  absolutely  secured  are  those 
against  which  gold  is  held  by  the  issue  department.  Government  bonds 
are  liable  to  heavy  depreciation  whenever  war  supervenes.  For  notes 
issued  by  English  banks  no  special  security  is  held  at  all.  Note  holders 
and  depositors  stand  on  precisely  the  same  footing  in  respect  of  their 
■claim  upon  the  assets  of  the  banks. 

In  the  case  of  the  Scotch  banks  tliere  is  even  a  more  striking  anomaly; 
for  while  supplies  of  gold  are  sent  up  to  Scotland  as  a  basis  for  extended 
issues,  the  gold  is  not  constituted  a  special  security  for  their  extended 
issues.  It  forms  a  part  of  the  general  assets  of  the  bank,  and  the  de- 
positors have  just  the  same  claim  to  it  as  these  very  notes. 

But  in  fact  the  Act  all  throughout  as  respects  Scotland  is  most  in- 
consequent. To  carry  it  to  a  logical  conclusion,  special  issues  of  notes 
ought  to  have  been  directed  for  the  excess;  each  of  them  stamped  with 
the  words  "this  note  is  secured  by  special  deposit  of  gold."  But  the 
bankers  of  Scotland,  shrewd  men  as  they  are,  would  never  have  consented 
to  sucli  discrimination  affninst  their  ordinary  issues.'^" 

But  the  important  question  remains,  viz.,  has  that  Act,  or  has  it  not, 
fulfilled  one  great  purpose  of  its  enactment,  namely,  the  placing  of  the 

75  One  of  tho  fnncies  of  the  currency  theorists  had  been  that  what  they  called 
the  overissue  of  the  Bank  of  England  had  arisen  from  its  power  to  issue  one 
pound  notes.  They  were,  therefore,  abolished,  very  unwisely.  One  of  the  most 
singular  features  of  the  long  discussion  that  took  place  at  that  period  was  that 
scarcely  a  single  reference  was  made  to  the  example  of   Scotland. 

76  In  making  these  observations  it  is  not  intended  to  cast  the  slightest  doubt 
upon  the  security  of  bank  notes  in  Great  Britain.  The  notes  are  abundantly  se- 
cure. But  they  are  not  secure  by  reason  of  the  provisions  of  Sir  Robert  Peel's 
Act. 


286  BAXKIXG    A\D    COMMERCE. 

finances  of  country,  as  represented  and  controlled  by  banks,  npon  such 
a  basis  as  would  cither  prevent  financial  panics  in  the  future,  or,  if  they 
should  recur,  ensure  that  they  should   be  of  very   limited   extent? 

A  general  idea  prevailed  that  it  would;  which  idea  was  founded  upon 
a  certain  theory  (which  theory  had  the  support  of  many  eminent  names) 
viz.,  that  all  panics  being  due  to  overtrading  and  speculation  (as  was 
universally  acknowledged)  and  such  overtrading  and  speculation  being 
largely  fostered,  and  helped  (as  they  supposed)  by  the  overissues  of 
banks,  if  overissuing  was  stopped,  overtrading  and  speculation  must,  per- 
force, be  prevented  or  confined  within  such  narrow  limits  that  panics  and 
revulsions  would  cease  to  trouble  the  land. 

But  alas  for  the  vanity  of  human  expectations !  Within  three  years 
from  the  passing  of  the  Act,  a  wave  of  panic  swept  over  the  country 
once  more.  And  strange  to  say,  it  was  found  that  the  effect  of  the  Act 
was  to  intensify  the  severity  of  the  panic,  and  that  the  only  recourse 
available  to  prevent  the  stoppage  of  the  Bank  of  England  itself,  and 
with  it  a  condition  of  universal  bankruptcy,  was  to  suspend  the  operation 
of  the  Act!  When  the  alternative  became  pressing,  shall  the  Bank  Act 
be  suspended,  or  shall  the  Bank  of  England  itself  suspend,  theory  gave 
waj^  and  common  sense  asserted  itself.  The  Act  was  suspended  by  order 
in  Council,  and  the  wave  of  panic  began  to  subside  immediately. 

Within  a  few  months  a  normal  condition  of  finance  prevailed.  But 
so  inveterate  is  the  force  of  tradition  in  English  legislation  that  no 
thought  seems  to  have  arisen  of  revising  the  provisions  of  the  Act.  It 
came  into  force  again;  and  again  it  was  fondly  hoped  that  peace  and 
security  would  prevail.  But  the  hopes  of  the  theorists  were  again  and 
again  disappointed.  After  the  lapse  of  ten  years  another  period  of  over- 
trading and  speculation  set  in,  not  in  England  only;  and  again  it  was 
evident  that  the  Bank  Act  aggravated  the  pressure.  The  operation  of 
the  Act  was  accordingly  suspended  again;  an  experience  that  was  re- 
peated once  more  about  twelve  years  afterwards. 

All  this  demonstrated  the  truth  of  what  the  opponents  of  the  Act 
contended,  viz.,  that  panics  arise  from  other  causes  than  overissues,  that 
overissues,  so-called,  do  not  originate  or  help  them,  and  that  restricting 
issues  will  not  prevent  them ;  and  that  Sir  Robert  Peel's  Act  was  nothing 
but  a  "fair  weather"  Act  which  would  always  have  to  be  set  aside  when 
a  storm  arose.  The  fact  is  undoubted  that  after  the  Act  was  passed  the 
course  of  commercial  and  financial  affairs,  and  especially  the  waves  of 
inflation  and  speculation,  the  fortunes  and  misfortunes  of  commercial 
houses  and  banks,  proceeded  exactly  as  they  did  before. 

The  Basis  of  Notk  Circulation  in  Canada. 

The  seventh  of  the  systems  of  circulation  named  above  is  that  which 
now  prevails  in  Canada.  It  is  the  final  result  of  the  long  process  of 
what  may  be  called  financial  evolution.  The  distinguishing  features  of 
this  system  are  as  follows: 


VARIOUS  THEORIES  OF   NOTE   CIRCULATION.         287 

First. — That  tlie  riglit  to  issue  notes  for  circulation  shall  be  confined 
to  corporations  that  are  registered  under  the  provisions  of  the  Banking 
Act. 

Secow^. — That  no  such  bank  shall  issue  notes  until  it  has  a  minimum 
of  five  hundred  thousand  capital  subscribed,  and  of  two  hundred  and  fifty 
thousand  paid  up. 

Third. — That  the  amount  of  such  issues  shall  be  kept  within  the  limit 
of  the  paid  up  capital. 

Fourth. — And  that  all  such  notes  shall  constitute,  in  case  of  failure 
of  the  bank  issuing  them,  a  first  lien  upon  all  its  assets,  and  upon  the 
double  liability  of  the  stockholders  in  addition. 

For  some  years  after  its  enactment,  this  important  provision,  which 
is  the  keynote  and  distinguishing  feature  of  the  note  circulation  of  Can- 
ada, stood  alone. 

But  to  make  assurance  doubly  sure,  there  was  added  to  it  after  a  time 
a  system  of  contribution  by  each  bank  of  a  certain  sum,  proportioned 
to  its  circulation,  to  constitute  a  guarantee  redemption  fund,  which  fund 
is  deposited  with,  and  is  at  the  disposal  of  the  Government,  for  the  re- 
demption of  the  notes  of  any  insolvent  bank,  should  the  provision  pre- 
viously named  prove  insufficient.  And  should  this  fund,  under  any  con- 
junction of  circumstances,  prove  also  insufficient,  provision  is  made  for 
futher  contributions,  until  the  redemption  of  every  note  is  actually  ac- 
complished. The  effect  of  this  is  very  far-reaching;  for  it  assures  that 
every  possible  asset  of  every  bank  in  the  country,  including  the  doiible 
liability  of  them  all,  is  pledged  for  the  redemption  of  the  notes  of  any 
single  insolvent  bank.  The  whole  of  the  banks  of  Canada  are  therefore 
pledged  for  one  another  in  the  matter  of  the  ultimate  redemption  of  their 
circulating  notes,  affording  a  security  for  the  issues  much  beyond  any- 
thing existing  in  the  world. 

It  is,  however,  interesting  to  note  that  the  provision  by  which  notes 
are  made  a  first  lien  in  case  of  a  bank's  failure  has  invariably  proved 
sufficient  for  the  redemption  of  its  whole  issue.  In  no  one  instance  has 
it  been  necessary  to  fall  back  upon  the  redemption  fund;  even  though, 
as  it  has  happened  in  more  than  one  case  during  a  number  of  years,  the 
issuing  bank  has  been  grossly  mismanaged.  Even  when  in  a  certain 
bank,  by  means  of  fraud  and  concealment,  a  large  issue  was  effected  be- 
yond the  statutory  requirement,  the  whole  of  them  were  redeemed  out 
of  the  assets  of  the  bank  itself.  Thus  the  security  by  first  lien  has  stood 
the  severest  tests  to  which  any  system  could  be  exposed.  But  with  the 
redemption  fund  behind  it,  the  safety  of  Canadian  bank  note  issues  is 
guarded  beyond  any  possibility  of  failure. 

How  Elasticity  Is  Secured. 

Yet  with  all  this  there  has  been  ample  provision  made  for  the  impor- 
tant matter  of  elasticity.  This  feature  of  note  issues  is  that  which  makes 
them  correspond  with  the  movements  of  commerce  from  season  to  season, 
and  from  year  to  year. 


288  BANKINXx    AND    COMMERCE. 

Commerce  begins  at  the  point  where  production  is  finished.  \VTien 
the  harvest  of  an  agricultural  country  like  Canada  is  ready  for  sale,  the 
merchant  steps  in  with  offers  to  purchase  it.  But  experience  has  demon- 
strated that  purchases  of  agricultural  produce  can  only  be  carried  out 
by  the  employment  of  current  money.  The  movements  of  commerce  in 
towns  and  cities  can  be  and  are  almost  wholly  effected  by  checks,  bills, 
and  promissory  notes.  But  for  purchase  of  agricultural  products  from 
the  producer  in  country  districts  nothing  will  answer  but  current  money; 
coin  for  small  change,  and  notes  for  larger  transactions.  When,  there- 
fore, the  time  of  harvest  comes  round  and  purchases  begin  to  be  active, 
an  immense  demand  for  notes  sets  in;  an  immense  outflow  of  notes  takes 
place,  which  continues  increasing  until  the  larger  part  of  the  harvest 
passes  into  the  hands  of  the  merchant.  This  great  annual  outflow  of 
money  (the  same  that  prevails  also  in  the  United  States,  in  Scotland, 
and  the  agricultural  parts  of  England)  necessitates  that  there  shall  be 
powers  of  issue  with  the  banks  over  and  above  the  ordinary  requirements. 
This  power  of  extra  issue  in  Scotland  is  provided  by  the  holding  of 
gold;  not  at  all  an  economical  process.  It  is  provided  in  Canada  by  the 
united  capital  of  the  banks  being  always  kept  at  a  point  far  higher  than 
that  to  which  circulation  ever  rises  at  its  highest  level.  Thus  the  power 
of  the  banks  to  provide  for  the  largest  outflow  of  notes  is  economically 
secured. 

For  a  long  period  previous  to  the  development  of  the  great  wheat- 
growing  regions  of  the  Northwest  the  circulation  of  the  Canadian  banks, 
as  a  whole,  at  its  highest  point  year  by  year  was  far  below  their  united 
capital;  that  is,  far  below  their  circulating  power.  But  in  the  year  1902 
so  vast  was  the  harvest  of  the  Northwest  that  this  highest  point  ap- 
proached so  near  to  the  united  capital,  before  the  reflex  wave  set  in,  that 
the  banks  came  to  a  general  conclusion  to  increase  their  capital.  Each 
one  acted  for  itself,  on  its  own  judgment  in  the  matter,  and  according  to 
its  special  necessity,  in  order  to  provide  for  the  expansion  in  future 
years.  Capital,  therefore,  has  been  increased  and  the  great  outflow  fully 
provided  for.  This  will  undoubtedly  continue  to  be  the  case  if  necessity 
arises  again. 

Thus,  then,  there  is  always  a  reserve  of  circulating  power  in  the 
country;  for  when  the  reflex  wave  sets  in,  notes  return  to  the  banks,  and 
there  accumulate  until  a  vast  store  lies  ready  in  the  safes  of  the  banks 
v/aiting  for  the  great  demand  to  set  in  for  the  movement  of  the  crops 
in  the  autumn. 

Let  it  be  noted  that  by  this  method  the  utmost  economy  of  finance  has 
been  secured;  for  the  capital  of  the  banks  that  has  been  paid  up  is  avail- 
able for  commercial  purposes  as  m-cII  as  the  store  of  notes  that  are  based 
ujion  it  when  wanted.  The  notes  that  lie  in  the  bankers'  safes  ready  for 
the  great  outflow  displace  nothing. 

Thus  it  is  that  the  difficult  problem  of  combining  absolute  safety  with 
perfect  elacticity  has  been  solved.     As  to  the  safetif,  it  has  been  shown  to 


VARIOUS   THEORIES   OF    NOTE    CIRCULATIOX.         289 

be  of  an  even  higher  degree  than  that  of  the  issues  of  the  Bank  of  Eng- 
land, or  of  the  national  banks  of  the  United  States;  while  its  elasticity 
has  been  proved  by  the  long  course  of  experience  to  be  perfect  in  its 
operation  and  that  in  a  country  -where  the  pursuits  of  agriculture  and 
forestry  furnisli  a  very  large  proportion  of  its  annual  production."" 

77  It  should  be  noted  that  a  small  part  of  the  circulating  notes  of  Canada 
(about  ten  per  cent.)  consists  of  the  issue  of  the  Government;  and  are  of  the 
denomination  of  one,  two  and  four  dollars.  All  the  notes  of  the  banks  are  of 
five  dollars  and  upwards,  corresponding  in  this  respect  exactly  with  the  issues  of 
the  Scotch  banks.  The  large  notes  of  the  Government  of  Canada  are  never  in 
circulation  at  all.  They  are  used  solely  by  the  banks  between  one  anther  to  set- 
tle balances  due,  and  are  expressly  framed  so  as  to  have  no  value  in  the  hands 
of  the  public. 

As  a  final  remark  with  regard  to  this  system  of  note  issues,  It  should  be 
stated  that  a  supervision  of  the  whole  system  has  been  placed  upon  The  Bank- 
ers' Association,  especially  created  a  corporation  for  the  purpose.  This  associa- 
tion checks  the  unsigned  notes  received  from  the  engravers  by  the  several  banks, 
together  with  the  amount  signed  and  taken  into  account  as  money  from  time  to 
time;  it  checks  the  circulation  account  of  each  bank,  and  supervises  their  de-- 
struction  when  finally  written  off.  The  association  in  this  matter  acts  as  an 
agent  for  the  Government,  and  ensures  that  the  provisions  of  the  law  are  com- 
plied with. 


I 


CHAPTER   XXXV. 

BANKING  ACT  OF  CANADA. 

Various  Clausfs  of  the  Act — Shakes  axp  Shaueiiolders — Directors 
— Powers  of  Banks- --Deposits — Reserves — Statements — Insol- 
vency— Penalties. 

IT  is  desirable  in  a  Avork  like  this  that  a  statement  of  the  leading  fea- 
tures of  the  Act  under  which  chartered  banks  do  business  in  Canada 

should  be  made  in  such  a  form  as  to  be  understood  by  all  classes  of 
the  community.  For  all  classes  are  interested  in  banks,  whether  they 
desire  it  or  not,  inasmuch  as  the  bulk  of  the  notes  circulating  as  money 
are  issued  by  them.  Whether  a  man  has  money  to  deposit  or  not,  whether 
or  not  he  needs  money  lo  carry  on  his  business,  he  must  in  the  nature  of 
things,  if  he  lives  in  Canada  at  all,  sometimes  have  the  notes  of  a  Cana- 
dian bank  in  his  possession  and  carry  them  at  his  risk.  But  the  provis- 
ions of  the  Act  are  of  interest  to  others  besides  Canadians,  for  it  is  uni- 
versally admitted  tc  be  of  high  excellence. 

The  power  to  establish  banks  that  can  issue  notes  for  circulation 
should  reasonably  be  considered  in  relation  to  the  general  welfare  of  the 
community.  That  should  be  well  understood ;  though,  indeed,  it  is  some- 
times lost  sight  of.  Banks  do  not  receive  powers  for  their  own  sake,  but 
for  the  advantage  of  the  people.  It  is  the  representatives  of  the  people 
in  Parliament  that  grant  these  powers;  and  when  it  is  considered  that  no 
professional  banker  has  ever  sat  in  Parliament,  and  only  few,  compara- 
tively, of  the  class  of  bank  directors  or  presidents,  it  becomes  apparent 
that  bank  legislation  must  have  been  considered  in  its  relation  to  the 
country  at  large,  and  not  simply  in  its  bearing  upon  the  interests  of  a 
particular  class. 

The  Canadian  Bank  Act  is  the  fruit  of  many  years  of  discussion, 
during  which  it  has  been  repeatedly  considered  by  committees  of  the 
House  of  Commons  and  the  Senate,  who  have  had  before  them  prominent 
members  of  the  mercantile  community,  as  well  as  professional  bankers 
of  experience.  The  Act  itself  is  a  consolidation  of  many  separate  acts 
formerly  enacted  by  Canadian  legislatures,  under  which  charters  to  carry 
en  the  business  of  banking  were  conferred  on  certain  corporations.  The 
provisions  of  these  early  charters  were  largely  framed  upon  those  pre- 
vailing in  the  United  States,  with  modifications  suited  to  the  circumstances 
of  Canada. 

But  soon  after  the  Provinces  of  Canada  were  confederated,  the  gen- 
eral subject  of  bank  charters  was  taken  up  in  Parliament  with  a  view  to 


J3AXKING    ACT    OF    CANADA.  291 

the  cstablishimMit  of  a  general  Act  for  the  whole  Dominion.  The  ex- 
isting charters  were  then  thoroughly  examined  in  committee  and  dis- 
cussed clause  by  clause,  the  result 'being  the  passing  of  that  one  general 
Act  under  which  banking  has  been  carried  on  by  all  incorporated  banks 
ever  since  1871.  At  intervals  of  ten  years  (being  the  limit  of  the  op- 
eration of  the  Act)  its  provisions  have  again  been  the  subject  of  ex- 
haustive discussion,  and  various  amendments  have  been  incorporated  there- 
in, all  designed  for  the  better  protection  of  the  public.  It  is  worthy  of 
note  that  the  whole  of  these  provisions  for  protection  were  suggested  by 
the  banks  themselves;  and  very  naturally  so,  for  the  banks  are,  at  all 
times,  by  far  the  largest  holders  of  each  others'  notes.  They  would  there- 
fore be  the  heaviest  sufferers  in  case  there  were  any  failure  of  redemp- 
tion. 

VvRiocs  Clauses  of  the  Act. 

The  Canadian  Bank  Act,  as  it  was  finally  passed  through  both  Houses 
of  Parliament  in  1901,  consists  of  104  clauses,  the  leading  features  of 
which  may  be  summarized  as  follows: 

1st. — Clauses  which  concern  the  esiablishment  of  a  bank; 

2d. — Clauses  relating  to  the  stoch  and  stockholders; 

Sd. — Clauses  relating  to  directors,  their  powers,  qualifications,  and 
responsibilities; 

4th. — Clauses  relating  to  the  issue  and  redemption  of  notes  for  cir- 
culation ; 

5th. — Clauses  with  regard  to  the  lending  of  money,  discounting  of 
bills  and  investing  in  securities;  also  as  to  deposits  and  reserves; 

6th. — Clauses  relating  to  the  statements  to  be  made  by  the  banks  to 
the  Government; 

7th. — Clauses  relating  to  insolvency; 

8th. — Clauses  imposing  penalties. 

It  is  proposed  in  this  chapter  to  give  a  brief  synopsis  of  the  Act  under 
these  heads. 

Of  the  Establishment  and  Incorporation  of  a  Bank. 

No  bank  can  be  established  unless  an  Act  of  Parliament  is  obtained 
for  the  purpose,  setting  forth: 

(1)  The  proposed  name; 

(2)  The  capital  to  be  subscribed; 

(3)  The  locality  of  the  head  office; 

(4)  The  names  of  provisional  directors. 

To  such  a  bank  all  the  provisions  of  the  Bank  Act  must  apply. 
The  subscribed  capital  must  7wt  be  less  than  $500,000  and  tliere  must 
be  $250,000  paid  up  before  business  can  be  commenced. 

No  business  shall  be  entered  upon  until  a  Certificate  has  been  given 


292  BANKIXG    AND    COMMERCE. 

by  the  Treasury  Board"-  that  the  provisions  of  the  Act  have  been  com- 
plied with,  and  this  within  one  year  of  the  passing  of  the  Special  Act  of 
Incorporation. 

The  large  requirement  as  to  capital  M-as  in  view  of  the  power  of  issu- 
ing notes  whicli  the  Act  confers. 

Clauses  Relating  to  the  Shares  and  Shareholders. 

(1)  Shares  umst  be  uniformly  of  $100. 

(2)  At  all  meetings  wliere  voting  takes  place  each  share  shall  count 
for  one  vote. 

(3)  Shareholders  may  vote  by  proxy.  But  no  officer  of  the  bank 
can  be  nominated  as  proxy,  and  all  proxies  must  be  renewed  every  two 
years. 

(4)  The  names  of  shareholders  must  be  registered  in  books  kept  for 
the  purpose  by  the  bank. 

No  transfer  or  assignment  of  shares  is  valid  unless  and  until  entered 
in  such  books.  And  the  owner  of  the  shares  is  the  person  whose  name 
is  on  the  register. 

(5)  For  any  debt  to  the  bank  incurred  by  a  shareholder  the  bank 
shall  have  a  lien  on  his  shares. 

(6)  The  shareholders  shall  meet  annually  and  elect  directors. 

(7)  They  shall  have  power  to  pass  by-laws  touching  the  following 
matters:  The  day  of  the  annual  meeting;  the  record  of  proxies;  the  num- 
ber of  directors,  their  qualifications,  and  the  mode  of  filling  vacancies; 
the  amount  of  discounts  and  loans  that  may  be  made  to  directors. 

(8)  Shareholders  may  authorize  directors  to  establish  guarantee 
and  pension  funds. 

In  addition  to  the  foregoing  are  clauses  relating  to  the  following  mat- 
ters: 

(1)  The  payment  of  calls  and  penalty  for  neglect. 

(2)  The  transfer  of  shares,  under  a  writ  of  execution. 

(3)  The  transfer  of  shares  by  will,  or  marriage,  or  bankruptcy. 

(4)  Lists  of  transfers  to  be  exhibited  in  the  bank. 

(5)  Persons  holding  shares  as  executors  or  trustees  shall  not  be 
personally  liable.  But  the  estate  or  funds  they  administer  shall  be  liable, 
provided  always  that  such  estate  or  trust  shall  have  been  expressly  named. 
In  default  of  this  the  executor  or  trustee  shall  be  liable  personally.     The 


78  The  Government  Treasury  Board  exercises  very  Important  functions  in  ttie 
practical  worl<ing  of  this  Act.  This  Board  was  constituted  by  Act  of  the  Domin- 
ion Parliament,  Sect.  9,  Cap.  28,  Revised  Statutes  of  Canada,  as  amended  by  50 
I  Victoria  Cap.  13  and  is.  In  substance  as  follows: 

9.  There  shall  be  a  Board  to  be  called  The  Treasury  Board  consisting  of  the 
Minister  of  Finance,  and  any  five  of  the  Ministers  belonging  to  the  Queen's  Privy 
Council  for  Canada,  to  be  nominated  from  time  to  time  by  the  Governor  in  Coun- 
cil. 

Sect.  10  Cap.  Revised  Statutes:  The  Minister  of  Finance  shall  be  the  Chair- 
man of  the  Treasury  Board,  and  the  Deputy  of  the  Minister  of  Finance  shall  be 
the  Secretary  thereof,  and  through  him  the  board  shall  communicate  with  any 
public  department,   or  officer,    or   other   person. 


BANKING    ACT    OF    CANADA.  293 

bank  shall  not  be  bound  to  see  to  the  execution  of  any  trust  to  which 
shares  in  its  stock  are  subject. 

In  addition  to  the  above  jorovisions,  the  Bank  Act  contains  the  fol- 
lowing relating  to  the  capital  as  a  whole: 

(1)  The  capital  may  be  increased  or  decreased  by  a  by-law  passed 
by  shareholders  at  the  annual  meeting,  or  at  a  meeting  called  for  the 
purpose,  to  any  amount  that  may  be  determined,  provided  only  that  the 
capital  paid  up  sliall  not  be  reduced  beloAv  $250,000. 

(2)  But  no  such  addition  or  reduction  shall  take  effect  unless  a 
certificate  approving  thereof  has  been  issued  by  the  Treasury  Board. 

(3)  Increased  stock  shall  first  be  offered  to  the  shareholders  pro 
rata  at  such  a  rate  as  ma}^  be  fixed  by  the  directors.  But  no  rate  shall 
be  fixed  which  will  make  the  premium,  if  any,  on  such  new  stock,  exceed 
the  percentage  which  the  existing  reserve  fund  bears  to  the  existing  cap- 
ital of  the  bank. 

Clauses   Relating  to   Directors. 

(1)  Each  director  must  hold  stock  paid  up  as  follows,  at  least: 
When   the   whole   paid   up   capital   is    $1,000,000  or 

less     $3,000 

From  $1,000,000  to  $3,000,000 4,000 

Exceeding  $3,000,000    5,000 

(2)  A  majority  of  the  directors  must  be  natural  born  or  naturalized 
British  subjects. 

(3)  The  whole  of  the  directors  shall  be  elected  annually. 

(4)  Vacancies  during  the  bank  year  to  be  filled  up  according  to 
provisions  of  by-laws. 

(5)  The  capital  and  all  the  affairs  and  concerns  of  the  bank  to  be 
managed  by  the  directors. 

(6)  They  shall  have  power  to  make  by-laws  as  follows: 
(a)    As  to  the  management  of  the  business  generally. 
(&)    As  to  the  duties  and  conduct  of  officers. 

(7)  They  may  appoint  such  officers  as  they  consider  necessary,  and 
remunerate  them  as  they  think  fit.  But  they  must  allow  no  officer  to  enter 
on  his  duties  until  he  has  given  satisfactory  security. 

(8)  They  shall  submit  to  the  shareholders  at  the  annual  meeting 
a  full  statement  of  the  affairs  and  condition  of  the  bank  and  also  such 
special  statement  as  may  be  called  for  in  any  by-law  duly  passed  by  the 
shareholders  either  in  annual  meeting  or  at  a  meeting  called  for  the 
purpose. 

(9)  They  shall  declare  dividends  half-yearly  or  quarterly  out  of 
the  profits  of  the  bank.  But  such  dividends  shall  not  be  such  as  to 
impair  the  paid-up  capital.  If  any  such  dividend  is  declared  the  direct- 
ors who  concur  therein  shall  be  jointly  and  severally  liable  therefor. 

(10)  If  any  part  of  the  capital  is  lost,  the  directors  shall  cause  the 
same  to  be  made  good  bv  the  shareholders. 


5.04  BANKING    AND    COMMERCE. 

(11)  They  shall  not  declare  any  dividend  beyond  eight  per  cent, 
per  annum  unless  the  rest  or  reserve  fund  amounts  to  at  least  thirty 
per  cent,  of  the  paid-up  capital. 

Clauses    Relating    to    the    Issue    and    Redemption    of    Notes    for 
Circulation. 

(1)  The  bank  may  issue  notes  payable  on  demand  to  an  amount 
not  exceeding  its  paid-up   capital. 

(2)  No  note  shall  be  of  lesser  amount  than  five  dollars — and  notes 
in  excess  shall  be  for  some  multiple  of  five  dollars. 

(3)  All  such  notes  shall  constitute  a  preferential  lien  on  all  the 
assets  of  the  bank  in  the  event  of  insolvency. 

(4)  The  payment  of  such  notes  is  further  secured  by  a  special 
Redemption  Fund,  to  which  all  banks  shall  contribute  pro  rata  to  the 
amount  of  their  average  circulation  year  by  year.  The  said  fund  to  be 
held  by  the  Government  under  the  name  of  "Bank  Circulation  Redemp- 
tion Fund,"  and  to  be  used  for  no  other  purpose  than  the  redemption  of 
the  notes  of  any  insolvent  bank. 

On  the  amount  contributed  b}^  each  bank,  interest  to  be  allowed  by 
the  Government.  The  total  amount  to  be  contributed  by  each  bank  to 
said  fund  shall  be  five  per  cent,  on  its  average  circulation.  If  pay- 
ments are  required  to  be  made  from  the  fund,  they  shall  be  made  pro 
rata  from  the  amount  of  each  existing  bank.  Banks  to  make  good  the 
deficiency  so  caused,  but  only  by  payments  not  exceeding  one  per  cent, 
per  annum. 

(5)  In  case  of  insolvency  the  notes  of  a  suspended  bank  shall 
bear  interest  at  the  rate  of  five  per  cent,  per  annum,  until  notice  has 
been  given  by  the  Government  of  its  readiness  to  redeem  them. 

(6)  No  bank  shall  pledge  or  hypothecate  its  notes  for  a  loan,  and 
no  Joan  so  made  shall  be  recoverable  from  the  assets  of  the  bank. 

If  the  total  circulation  at  any  time  exceeds  the  capital  of  the  bank, 
the  bank  shall  incur  the  following  penalties,  viz.:  If  the  excess  be  not  over 
$1000  the  penalty  shall  be  the  amount  of  the  excess;  if  over  $1000  and 
not  over  $20,000,  the  penalty  to  be  $1000;  if  over  $20,000  and  not  over 
$100,000,  a  penalty  of  $10,000;  if  the  amount  of  the  excess  is  o%'er 
$100,000  and  not  over  $200,000,  a  penalty  of  $50,000;  and  if  the  amount 
cf  such  excess  is  over  $-200.000,  a  penalty  of  $100,000.'" 

79  Those  pfT.alties,  and  the  latter  one  especially,  will  strike  any  one  who  is 
acquainted  with  the  subject  as  being  unreasona'bly  laige,  seeing  that  the  banks 
In  Canada  are  Issuing  bills  for  the  carrying  on  of  the  business  of  the  country; 
that  they  are  doing  this  day  by  day,  at  all  their  branches  simultaneously;  and 
that  in  an  active  condition  of  business,  a  bank  with  numerous  branches  may  pay 
out  to  its  customers  the  largest  amount  above  named  in  a  single  day.  These  pen- 
alties suggest  that  an  impression  must  have  prevailed  in  Parliament  that  it  would 
be  detrimental  to  the  public  interest  for  a  bank  under  any  circumstance,  and  even 
for  a  day,  to  issue  bills  beyond  the  authorized  amount;  the  truth  being  that  the 
bills  are  so  surrounded  with  safeguards  that  the  public  could  not  possibly  suffer 
loss  even  If  such  Issue  were  made.     This  has  been  demonstrated  by  experience. 


BANKING    ACT    OF    CANADA.  295 

At  the  revision  of  the  bank  charters  which  came  into  force  in  1901 
an  additional  safeguard  was  inn)oscd  by  placing  the  Avhole  supervision 
of  the  manufacture,  distribution  and  issue  of  circulating  notes  of  the 
banks  under  the  supervision  of  the  Bankers'  Association,  upon  whom 
was  also  placed  the  responsibility  of  seeing  that  the  destruction  of  can- 
celled notes  was  carried  out  in  a  proj^er  manner. 

The  Association  had  previously  been  constituted  an  incorporated  body, 
largely  with  a  view  to  the  exercise  of  these  functions.  The  banks  are 
thereby,  as  a  body,  constituted  guardians  of  their  mutual  interests;  than 
which  nothing  can  be  more  reasonable,  seeing  that  by  the  operation  of 
the  bank  note  redemption  fund  they  are  made  ultimately  liable  for  each 
others'  issues. 

Powers  with  Regard  to  the  Lending  of  Money  and  Other  Uses  of 
THE    Funds    of   the    Bank,    Also    with    Regard 
TO    Deposits    and    Reserves. 

(1)  The  bank  may  lend  money  on  bills  of  exchange,  bonds,  stocks, 
debentures  and  standing  timber;  may  discount  bills,  and  carry  on  such 
business  as  generally  appertains  to  banking.  But  it  shall  not  lend  money 
on  real  estate  or  other  immovable  property,  or  ships.  Yet  it  may  take 
and  hold  any  of  these  as  additional  security  for  debts  already  con- 
tracted. 

(2)  But  it  shall  not  hold  real  property  more  than  seven  years 
without  permission  of  the  Treasury  Board,  and  then  only  for  five  years 
longer. 

(3)  The  bank  shall  only  lend  money  on  merchandise  when  the  same 
is  pledged  to  it  at  the  time  the  loan  is  made,  and  then  only  on  a  ware- 
house receipt,  pledge,  or  bill  of  lading,  which  warehouse  receipt  or 
pledge  in  certain  specified  cases  may  be  given  by  the  owners  of  the 
goods. 

It  shall  have  the  power  to  sell  the  goods  after  notice.  Elaborate 
provisions  are  contained  in  the  Act  respecting  these  powers  to  loan  on 
merchandise,  all  being  designed  to  safeguard  the  rights  of  ordinary 
creditors. 

(4)  There  are  also  provisions  respecting  property  which  the  banlc 
may  acquire,  whether  movable  or  immovable,  also  as  to  its  power  of 
sale  and  realization. 

(5)  Any  person  making  a  false  statement  as  to  the  goods  pledged 
by  a  warehouse  receipt  or  bill  of  lading,  or  who  removes  any  goods 
pledged  to  a  bank  without  its  consent,  or  withholds  them  when  demanded, 
is  liable  to  imprisonment  for  a  term  not  exceeding  two  years. 

(6)  For  all  ad\ances  made  upon  warehouse  receipts  or  bills  of  lad- 
ing the  bank  shall  hold  a  preferential  lien  upon  the  goods  prior  to  the 
claim  of  a  non-paid  vendor,  if  such  there  be.  And  if  such  vendor  have 
a  lien  upon  the  goods  at  the  time  the  advance  was  made,  preference  of 
the  bank  will  still  hold  good,  unless  it  had  knowledge  of  the  prior  lien. 


296  BANKING    AND    COMMERCE. 

(7)  The  bank  shall  not  be  liable  to  penalty  or  forfeiture,  for  usury; 
but  it  shall  not  be  able  to  recover  by  action  at  law  more  than  seven  per 
cent,  per  annum. 

Deposits. 

(8)  The  bank  can  receive  deposits  from  any  person  and  repay  them 
to  the  same  perspn;  subject,  however,  to  any  law  of  any  of  the  provinces 
of  Canada  imposing  disability  on  certain  classes  of  persons.  Pro- 
vided always  that  from  such  persons  deposits  may  be  received  and  re- 
paid up  to  five  hundred  dollars. 

The  bank  shall  not  be  bound  to  see  to  the  execution  of  any  trust, 
whether  expressed  or  implied,  to  which  any  deposit  may  be  subject,  or 
to  the  application  of  the  money  paid  on  such  deposit. 

If  a  deposit  is  made  in  the  name  of  two  persons  the  receipt  of  one 
shall  be  a  sufficient  discharge;  or,  if  in  the  name  of  more  than  two,  the 
receipt  of  the  majority. 

Money  of  a  deceased  depositor  can  only  be  drawn  bj'  production  of  a 
notarial  copy  of  will,  or  copy  of  probate  or  letters  of  administration  by 
a  competent  court. 

Reserves. 

The  bank  shall  always  hold,  as  part  of  its  reserve*"  of  cash  on  hand, 
not  less  than  forty  per  cent,  thereof  in  the  legal-tender  notes  of  the 
Dominion;  and  the  Finance  Minister  shall  always  deliver  such  notes  in 
exchange  for  specie  at  the  offices  where  legal-tender  notes  are  redeem- 
able, which  places,  in  1901,  were  Montreal,  Toronto,  Halifax,  Ottawa,  St. 
John,  N.  B.,  Winnipeg,  Charlottetown  and  Victoria,  B.  C. 

Clauses  Relating  to  Statements  to  the  Government. 

These  returns,  which  are  sent  monthly,  and  are  summarized  and 
published  in  the  "Canada  Gazette,"  were  formerly  much  simpler  than 
they  were  subsequentlj?^  made,  and  in  their  present  form  are  so  detailed 
and  elaborate  that  none  but  experts  can  properly  appreciate  them. 

The  points  upon  which  information  is  desirable  are  of  interest,  partly 
to  the  general  public,  partly  to  bank  stockholders  and  investors,  and 
partly  to  other  bankers  and  the  Government. 

The  public  are  interested  in  knowing  how  the  banks  as  a  whole  are 
progressing,  as  to  the  total  amount  of  their  circulation,  deposits 
and  discounts.  All  these  are  indices  of  the  growth  or  otherwise  of  the 
business  and  wealth  of  the  coimtry  at  large.  But  the  jiublic  have  little 
or  no  interest  in  knoAving  the  amount  of  overdue  bills,  or  what  amount 
of  the  banks'  funds  are  invested  in  bonds  and  stocks^  or  in  what  partic- 
ular form  its  reserve  of  cash  is  maintained. 

But  bank  stockholders  and  other  banks  are  interested  in  knowing 
what  cash  reserves  or  available  resources  the  individual  banks  are  keeping, 
also  what  amount  of  its  funds  each  bank  employs  from  time  to  time  in 

80  But  there  is  no  provision  as  to  the  total   amount   of   such  reserve. 


BANKING    ACT    OF    CANADA.  297 

discounting  bills  and  trade  advances,  and  how  much  in  stock  exchange 
loans  and  debentures,  also  how  much  real  estate  a  bank  has  acquired  and 
whether  any  bank  is  borrowino;  from  another  bank. 

In  fact,  bankers  and  stockholders  are  all  interested  in  seeing  whether 
any  individual  bank  is  stretching  out  its  business  beyond  safe  bounds, 
and  thereby  jeopardizing  its  position.  As  for  the  Government,  its  main 
concern  is  to  see  whether  the  bank's  circulation  is  within  the  author- 
ized limit,  and  whether  in  the  cash  reserve  there  is  held  the  prescribed 
proportion  of  legal-tender  notes. 

It  is  also  of  interest  that  it  should  be  generally  known  what  are  the 
total  advances  to  directors,  inasmuch  as  instances  have  occurred  in  bank- 
\ng  where  the  position  has  been  seriously  jeopardized  by  such  advances 
being  allowed  an  undue  amount. 

The  INIonthly  Return,  as  now  prescribed  by  law,  is  as  follows: 

Capital   authorized    $......... 

Capital    subscribed    

Capital   paid   up 

Amount   of   Rest 

Rate  per  cent,  of  last  dividend 

Liabilities. 

( 1 )  Notes   in  circulation $ 

(2)  Balance    due    to    Dominion    Govt 

(3)  Balance  due  to  Provincial  Govts 

(4)  Deposits   by   the   public   in    Canada   pay- 

able   on    demand 

(5)  Deposits    in    Canada    payable    after    no- 

tice     

(6)  Deposits   not   in    Canada 

(7)  Loans  and  rediscounts  from  other  banks 

(8)  Deposits     by     other    banks     in     Canada, 

including    balances    due 

(9)  Due    to    agencies    of    the    bank,    or    to 

other  banks  in  the  United   Kingdom 

(10)  Due  to  agencies  or  banks  elsewhere 

(11)  Other    liabilities     

Total    liabilities     

Assets. 

( 1 )  S])ecie    $ 

(2)  Dominion  notes    

(3)  Deposit  tc   secure   circulation 

(4)  Notes  and  checks  of  other  banks 

(5)  Loans    to    other    banks     secured,   includ- 

ing bills  rediscounted 


298  BANKING    AND    COMMERCE. 

(6)  Due  from  other  banks  in  Canada 

(7)  Due  from  agencies  of  the  bank  or  other 

banks  in  the  United   Kingdom 

(8)  Balances  due  from  agencies  of  the  bank, 

or  other  banks  or  agencies  elsewhere 
than  in  Canada  or  the  United  King- 
dom      

(9)  Dominion     and     Provincial     Government 

securities     

(10)  Canadian       municipal      securities       and 

British,  foreign  or  colonial  public  se- 
curities  other   than   Canadian 

(11)  Railway    and    other    bonds,    debentures 

and     stocks 

(12)  Call    and    short    loans    on    stocks    and 

bonds    in    Canada 

(13)  Call  and  short  loans  elsewhere  than  in 

Canada     

(14)  Current   loans    in    Canada 

(15)  Current  loans  elsewhere  than  in  Canada. 

(16)  Loans  to  the  Government  of  Canada.  .  . 

(17)  Loans   to   Provincial   Governments 

(18)  Overdue  debts    

(19)  Real  estate,  other  than  bank  premises.  . 

(20)  Mortgages    on   real   estate    sold    by    the 

bank     

(21)  Bank  premises    

(22)  Other  assets,  not  already  included 

Total    assets $ 

Aggregate  amount   of  loans   to   directors   and 

firms  of  which  they  are  partners ....    ^ 

Average  amount  of  specie  held  during  the 
month 

Average  amount  of  Dominion  notes  held  dur- 
ing  the   month 

Greatest  amount  of  notes  in  circulation  at  any 
time  during  the  month 


This  return,  it  will  be  seen,  is  in  remarkable  detail,  and  it  affords  to 
bankers  a  certain  amount  of  general  information  as  to  what  their  neigh- 
bors are  doing.  This,  of  course,  is  of  much  interest  to  them.  But  it  is 
questionable  whether  much  of  the  information  might  not  be  summarized 
with  advantage,  so  far  as  the  Government  and  the  public  are  concerned. 
And  it  is  certainly  questionable  whether  the  extraordinary  detail  of  these 
returns   operates   as   a   check   upon   illegitimate   banking.      Such  a   check 


RANKING    ACT    OF    CANADA.  299 

may  have  been  intended,  but  experience  does  not  bear  out  tlie  supposi- 
tion that  these  returns  are  effectual  for  that  purpose. 

Clax'ses  Relating  to  Ixsolvexcy. 

The  closing  of  the  doors  of  a  bank  and  suspension  of  payment  do 
not  ipso  facto  operate  to  place  a  bank  in  insolvency. 

Suspension  requires  to  be  continued  for  ninety  ciaj/s  consecutively, 
or  for  ninety  in  all,  if  at  intervals  during  twelve  months. 

But  suspension  for  t'hat  period  constitutes  the  bank  insolvent  and 
operates  as  a  forfeiture  of  its  charter;  which  charter,  however,  is  con- 
tinued for  the  purpose  of  winding  up  the  bank. 

It  is,  however,  provided  that  if  any  bank  suspends  payment,  the 
Bankers'  Association  shall  api)oint  a  curator  to  supervise  the  affairs  of  the 
bank;  and  it  shall  be  his  duty  to  make,  in  the  first  place,  all  needful 
arrangements  for  the  payment  of  the  notes  of  the  bank,  and  then  for 
protecting  tlie  rights  and  interests  of  the  creditors  generally.  The 
curator  to  hold  office  until  a  liquidator  is  appointed  to  wind  up  the  bank, 
or  until  it  resumes  business. 

If,  after  sus})ension  for  ninety  days,  no  proceedings  are  taken  with 
a  view  to  the  winding  up  of  the  bank  by  the  appointment  of  a  liquidator 
or  otherwise,  the  directors  shall  make  calls  upon  the  stockholders  for 
such  sums  as  they  may  deem  needed  to  pay  all  the  liabilities  of  the 
bank.  Stockholders  who  have  transferred  their  shares  within  sixty  days 
of  the  suspension  of  the  bank  shall  be  liable  to  pay  the  foregoing  calls 
as  if  they  held  them  at  the  time  of  suspension.  But  they  shall  have 
recourse  against  those  by  whom  the  shares  are  actually  held  at  the  time. 
It  is  also  provided  that  no  statute  of  limitations  or  prescription  shall 
have  any  application  to  a  bank.  In  all  other  respects  the  procedure  in 
the  case  of  the  insolvency  of  a  bank  is  the  same  as  that  in  the  case  of 
an  ordinary  company  or  mercantile  firm. 

Penalties. 

The  act  imposes  sundry  penalties  for  violation  of  its  provisions  :^^ 
(1)    For   neglecting    to    pay   calls    when    due,   ten   per   cent.;   or   the 
directors  mav  declare  such  shares  to  be  forfeited. 


81  The  clause  that  imposes  a  penalty  of  $500  for  each  violation  of  the  Act 
comprised  within  sections  from  64  to  7S  inclusive,  cannot  but  strike  an  observer 
as  singularly  liable  to  abuse  at  the  hands  of  an  arbitrary  administration.  Those 
sections  are  not  only  voluminous  and  complicated,  covering  a  great  number  of 
actions  of  a  totally  different  character,  but  some  of  them  are  notoriously  difficult 
to  interpret,  and  are  open  to  different  constructions  as  they  apply  to  the  numer- 
ous and  varied  circumstances  of  daily  banking  business.  Other  penalties  of  the 
Act  are  for  single  specific  offenses  respecting  which  there  can  be  no  dispute; 
such,  for  example,  as  not  holding  a  proper  quantity  of  Dominion  notes,  or  for  an 
over-issue   of  notes,    or   not   sending   in   returns  within   the  specified   time. 

All  tliese  are  definite  acts  and  easily  provable.  But  what  shall  be  said  of  a 
clause  that  sweeps  within  a  reiterated  series  of  penalties  a  large  number  of 
complicated  provisions  relating  to  advancing  money  in  aid  of  the  building  of 
ships,    or    acquiring,    iiolding,    and    releasing  warehouse  receipts,    pledges,   and   hy- 


300  BANKING    AND    COMMERCE. 

(2)  For  liolding  less  than  i'oTty  per  cent,  of  cash  reserves  in  Do- 
minion notes,  five  hundred  dollars  per  day. 

(3)  For  an  over-issue  of  circulating  notes.  (These  penalties  have 
already  been  referred  to.) 

(4)  For  violating  any  of  the  provisions  of  the  Act  relating  to  the 
securities  on  which  money  can  be  lent,  or  to  real  property  acquired,  or 
mortgages  thereon,  for  each  violation  a  penalty  of  five  hundred  dollars. 

(5)  For  not  sending  monthly  returns  in  proper  time,  fifty  dollars 
per  day. 

(6)  For  not  sending  any  sj:)ecial  returns  required  by  the  Minister 
of  Finance,   five  hundred  dollars   per   day. 

(7)  For  not  sending  list  of  shareholders  annually  at  the  time  ap- 
pointed, fifty  dollars  per  day. 

(8)  For  not  sending  list  of  unpaid  dividends,  unpaid  balances  and 
unpaid  drafts,  fifty  dollars  per  day. 

The  two  clauses  which  follow  impose  penalties  upon  directors  or 
officers  of  the  bank. 

(9)  For  declaring  any  dividend  which  impairs  the  paid-up  cap- 
ital of  the  bank;  all  directors  who  knowingly  concur  therein  shall  be 
jointly  and  severally  liable  therefor  as  a  debt  due  to  the  bank. 

(10)  P^or  giving  a  fraudulent  or  unfair  preference  to  a  creditor, 
or  for  wilfully  making  any  false  return  or  statement  of  the  affairs  of 
the  bank,  the  parties  who  have  prepared  or  signed  such  statement  shall 
be  liable  to  imprisonment  for  a  term  not  exceeding  five  j'cars,  and  shall 

pothecs  of  variously  described  articles  of  merchandise,  respeetingr  the  interpre- 
tation of  which  lawyers  and  judges  have  held  and  are  likely  to  continue  to  hold 
different   opinions. 

It  is  to  be  noted  that  the  actions  hedged  round  by  such  extraordinary  pro- 
visos and  penalties  are  such  as  must  occur  repeatedly  in  any  single  day's  busi- 
ness, when  the  movement  of  the  crops  is  actually  going  on.  Yet  the  penalty  is 
for  each  separate  act,  which,  it  has  been  contended,  means  the  payment  of  each 
check.  The  whole  spirit  of  these  clauses  would  imply  that  the  lending  of  money 
for  the  purchase  of  agricultural  produce  is  a  very  suspicious  business,  fraught 
with  danger  to  the  community,  and  to  be  jealously  watched  by  the  Government. 
It  may  be  said,  and  probably  has  been  said,  and  will  be  again,  that  a  banker  can 
easily  keep  himself  safe  by  not  lending  money  under  these  clauses;  in  fact,  he  need 
not  lend  money  to  move  the  crops  at  all  unless  he  pleases.  This  is  easy  to  say; 
but  in  so  saying  it  is  forgotten  that  the  warehousing  clauses  of  the  Bank  Act 
were  devised  by  Parliament  for  the  very  purpose  of  facilitating  these  operations 
of  commerce  which,  more  than  any  otheis,  promote  the  prosperity  of  the  coun- 
try; viz.,  the  marketing,  transporting,  and  exporting  of  its  crops  and  produc- 
tions. The  "moving  of  the  crops"  as  it  is  technically  termed,  including  the 
productions  of  the  forest,  sea,  and  mine,  is  universally  recognized  as  the  foun- 
dation of  all   the  other  industries  of  Canada. 

Now,  if  the  clauses  of  the  Bank  Act  that  were  expressly  framed  to  enable 
the  banks  to  promote  this  are  so  hedged  about  by  provisos  and  penalties,  that 
bankers  cannot  act  upon  them  without  great  risk  of  being  heavily  fined,  it  is 
obvious  that  both  clauses  and  penalties  need  reconsideration.  There  is  the  more 
reason  for  the  latter  in  the  fact  that  all  the  dubious  clauses  relate  to  the  se- 
curity for  loans  of  money,  a  violation  of  which  carries  its  own  penalty  in  the 
forfeiture  of  the  security. 

This  forfeiture  can  be  enforced  by  ordinary  process  of  law,  and  renders  ar" 
special   penally   unnecessary. 


BAXKIXG    ACT    OF    CANADA.  SOI 

be  responsible  for  all  damages  sustained  by  any  person  in  consequence 
thereof. 

The  above  penalties  are  all  applicable  to  a  bank  in  its  corporate  ca- 
pacity, or  to  one  or  more  of  the  officers.  But  the  Act  provides  for  penal- 
ties applicable  to  offences  by  other  persons,  thus: 

(1)  For  issuing  any  ])ill  or  note  intended  to  circulate  as  money 
four  hundred  dollars. 

(2)  For  using  the  title  of  bank,  or  banking  company  (or  the  like 
cor))ornte  words),  without  authority  from  this  Act^  a  fine  of  one  thou- 
sand dollars,  or  imprisonment  for  a  term  of  not  over  five  years. 

(3)  For  defacing  any  Dominion  or  Provincial  note,  a  penalty  not 
exceeding  twenty  dollars. 

Such  it*  the  Banking  Act  of  Canada,  which,  though  not  without  de- 
fects, is  nevertheless  by  general  admission  an  admirable  compendium 
of  what  is  necessary  and  desirable  for  a  banking  corporation  to  be  per- 
mitted to  do,  or  to  be  prohibited  from  doing. 

The  Act  aims  to  include  within  one  statute  all  necessary  legislation 
on  the  subject  except  that  relating  to  promissory  notes  and  bills  of 
exchange,  which  are  dealt  with  in  a  sejiarate  act.  The  banking  legisla 
tion  of  Canada  is  the  final  issue  of  much  consideration  from  many  quar- 
ters and  much  discussion  of  opposing  views  and  theories  during  a  long 
series  of  years.  It  is,  in  its  main  features,  and  in  much  of  its  detail, 
especially  adapted  to  the  circumstances  of  Canada  as  a  country  of  varied 
productions,  various  lines  of  business  and  manufacture,  and  of  a  high 
stage  of  industrial  development. 

But  some  of  its  clauses  bear  evidence  of  the  prevalence  of  theoretical 
views  as  opposed  to  those  that  are  practical,  and  have  doubtless  been 
insisted  upon  by  parliamentary  or  governmental  doctrinaires,  in  opposi- 
tion to  those  who  have  practical  knowledge. 


CHAPTER   XXXJ'I. 

FINANCIAL  PANICS  AND  REVULSIONS  IN  ENGLAND  AND 
THE  UNITED  STATES. 

Panic  of  1825  in  England — Revulsion  of  1838-39 — Crisis  of  1847 — 
Financial  Collapse  of  1Sj7 — Panic  of  1866  in  England — Les- 
sons to  be  Learned. 

FEW  events  are  at  the  same  time  more  disturbing  to  read  of  and 
yet  more  instructive  than  the  narrative  of  the  panics  and  re- 
vulsions M'hich  during  the  last  century  troubled  the  financial  world. 
They  are  worthy  of  cartful  study  for  two  reasons:  On  the  one 
hand  to  restrain  the  ardent  and  sanguine-tempered  from  proceeding  far 
in  a  course  which  will  inevitably  end  in  disaster;  and  on  the  other  to 
prevent  the  men  who  are  pessimistically  inclined  from  mistaking  passing 
clouds  of  trouble  for  such  symptoms  of  disturbance  as  usher  in  a  finan- 
cial storm.  Jt  is  by  carefully  noting  these  events  of  the  past  that  a  man 
of  financial,  responsibility  can  steer  a  safe  course  in  the  present  and  avoid 
cither  rashness  or  pessimism. 

In  this  chapter  a  brief  summary  will  be  given  of  several  of  the  more 
important  of  these  reverses,  consideration  of  which  will  well  repay  perusal 
even  now.  For  if  we  go  back  as  far  as  the  vear  18'25,  we  shall  find  our- 
selves in  a  condition  of  things  remarkably  like  what  has  prevailed  in 
later  times;  and  the  warning  lessons  of  this  panic  will  be  found  perti- 
nent at  the  present  day. 

Drawing  somewhat  on  the  account  given  of  the  events  preceding  and 
accompanying  these  panics  by  authorities  like  Gilbert  and  McLeod,  and 
to  some  extent  from  ray  own  knowledge,  we  will  begin  with  a  notable 
panic  in  England. 

The  Panic  of  ISS.*)  in  England. 

After  several  years  of  prosperity,  clearly  indicated  by  the  amplitude 
of  the  stock  of  bullion  in  the  Bank  of  England,  the  Government  de- 
termined upon  the  reduction  of  the  interest  upon  nearly  a  quarter  of  the 
natioiial  debt.  This  vast  operation  had  a  very  considerable  iuHuence  in 
curtailing  the  incomes  of  many  ))crsons  who  could  ill  afford  it.  and  pre- 
pared them  to  look  out  for  more  profitable  investments.  Just  at  this 
period  the  long  contest  between  Spain  and  her  South  American  Colonies 
had  now  finally  terminated  in  favor  of  the  Colonies.  The  recognition 
of  the  independence  of  the  South  American  States  and  ^fcxico  apparently 
opened  out  a  boundless  field  for  the  consumption  of  British  manufactures, 
and  a  spirit  of  speeuhition  ra))idly  rose,  influenced  by  visions  of  countless 
wealth  io  be  extracted  from  gold  and  silver  mines.  Immense  schemes 
were  formed  for  working  these  mines  with  British  capital. 

Besides   this,   the  long   struggle   for    independence   had    inspired   the 

302 


PANICS  IN  ENGLAND  AND  THE  UNITED  STATES.     303 

British  people  with  sympathy  for  the  juvenile  republics  i)olitic'ally  con- 
sidered, and  when  they  wanted  to  borrow  money  to  support  their  credit, 
British  people  were  only  too  eager  to  lend  it.  It  is  alleged  that  in  these 
two  ways  <£  150,000,000  of  British  cajiital  was  placed  in  Mexico  and 
South  America,  much  of  which  was  lost.  The  speculation  in  mines 
speedily  developed  into  a  mania,  and  let  it  be  noted  that  those  were  all 
in  a  trans-Atlantic  country,  leading  to  immense  exports,  the  greater 
part  of  nhich  were  never  paid  for.  In  all  these  speculations  only  a 
small  installment,  seldom  exceeding  five  per  cent.,  was  j^aid  at  first,  so 
that  a  very  moderate  rise  in  the  price  of  the  shares  produced  a  large  profit 
on  the  sum  actually  invested.  All  the  gambling  propensities  of  human 
nature  were  therefore  urged  into  action,  and  crowds  of  individuals  of 
every  description  hastened  to  venture  some  portion  of  their  property  (by 
way  of  margin)  in  schemes  of  which  scarcely  anything  was  known  except 
the  name.  As  a  natural  consequence  the.  prices  of  many  other  commodi- 
ties doubled  and  tripled. 

This  is  a  most  significant  point,  for  it  is  a  fact  that  there  is  never 
so  much  buoyancy,  and  such  mutual  congratulation,  as  in  the  period  be- 
fore the  bursting  of  financial  storms. 

The  speculative  fever  was  at  its  height  in  the  first  months  of  18i25. 
But  the  enormous  absorption  of  capital  that  had  taken  place  had  made 
money  scarce  and  dear.  And  that  ominous  symptom,  the  steady  decline 
in  the  bullion  in  the  Bank  of  England,  had  begun  to  be  apparent.  In 
January,  1824,  it  amounted  to  .€14,200,000.  In  July  to  £11,800,000. 
By  January,  1825,  it  had  fallen  to  £.9,500,000.  Yet  even  the  Bank  of 
England  itself  failed  to  read  the  signs  of  the  times,  and  went  on  dis- 
countins;  as  usual.  It  Avas  not  until  the  bullion  was  reduced  to  £6,500,000 
that  it  took  measures  to  stop  the  drain  by  curtailing  its  discounts.  But  it 
was  too  late.  That  measure  ought  to  have  been  taken  six  months  earlier. 
As  it  was,  enormous  commitments  and  engagements,  made  in  the  time 
of  inflation,  had  to  be  carried  out.  The  drain,  therefore,  went  on.  In 
July  the  bank  had  only  £4,170,000  of  bullion  wherewith  to  meet  all 
the  engagements  to  note-holders  and  depositors.  This  was  reduced  to 
£3,150,000  in  October  and  to  £3,012,000  in  November.  Then  the  storm 
burst. 

Thfire  can  be  no  wonder  that  a  panic  prevailed,  for  the  drain  had 
gone  on  until  theri--*  was  actually  less  than  £1,500,000  of  specie  left  in 
the  Bank.  A  few  days  more,  and  the  Bank  itself  must  have  suspended 
paj'ments  in  specie.  Gold  would  then  have  gone  to  a  premium,  as  it  had 
done  during  the  wars  with  Napoleon,  and  a  universal  dislocation  of  busi- 
ness and  general  insolvency  have  ensued. 

The  one  marked  feature  of  this  crisis  was  the  large  number  of 
Banling  failures  that  it  brought  about.  First  came  the  stoppage  of  a 
great  bank  in  Ph'mouth.  Then  followed  a  greater  collapse  still,  that 
of  Wentworth  &  Co.  of  Yorkshire.  The  London  banking  house  of  Pole 
&  Co.  was  also  forced  to  succumb.  The  Bank  of  England  had  lent  them 
£300,000.  but  this  was  of  no  avail.  Pole  &  Co.  were  agents  of  no  less 
than  forty  country  banks,  and  their  fall  was  the  signal  for  a  general  run 
upon  the  London  banks,  several  more  of  which  gave  way,  spreading  uni- 


SOi  BANKING    AND    COMMERCE. 

versal  consternation  amongst  the  country  bankers,  sixty-three  more  of 
■which  succumbed.  Shortly  after  the  cessation  of  the  panic  gold  began 
to  flow  in  from  abroad,  and  confidence  to  be  restored. 

The  panic  ceased  -when  it  became  evident  that  the  Government 
would  stand  by  the  Bank  of  England,  and  the  Bank  by  the  country. 

But  the  events  whicli  had  taken  place  had  important  consequences, 
one  of  which  was  the  rlopj^ng  of  all  further  issues  of  one-pound  notes 
by  the  Bank  of  England;  and  another  the  beginning  of  the  agitation  for 
the  abolition  of  its  banking  monopoly,  and  the  establishment  of  Joint- 
Stock  Banks.  The  first  measure  was  founded  u))on  a  delusion,  as  might 
have  been  seen  had  men  cast  their  eyes  towards  Scotland.  There  had 
been  no  panic  and  revulsion  there,  nor  any  circumstancs  leading  up  to 
it.  Yet  one-pound  notes  were  the  universal  medium  of  issue,  as  they 
have  been  ever  since.  And  although  there  have  been  two  failures  of  im- 
mense magnitude  amongst  Scotch  banks  since  then,  in  neither  case  was 
the.  Jisaster  attributable  to  the  note  issues.  In  both  cases,  in  the  sphere 
where  one-pound  notes  are  most  in  evidence  as  the  medium  of  business, 
that  is,  in  the  country  branches,  the  business  of  both  banks  was  in  a 
sound  condition. 

During  the  debate  on  this  subject  in  Parliament,  no  less  a  person 
than  Sir  Robert  Peel  expressed  the  opinion  that  if  the  Scotch  system  of 
banking  had  prevailed  in  England  in  179"  and  in  recent  years,  no  such 
calamities  would  have  happened  as  those  they  were  discussing.  He 
seems,  however,  to  have  entirely  forgotten  this  in  subsequent  years. 

Panic  of  1838-39. 

The  revulsion  of  1838-39  may  be  passed  by  briefly,  as  it  presented 
features  in  no  essential  respect  differing  from  those  that  preceded  it, 
and  those  which  followed.  It  took  its  rise  largely  from  the  enormous 
railwav  developments  of  the  period,  leading  into  the  passing  of  millions 
of  floating  assets  into  a  f.red  form,  ycilding  no  remuneration  for  many 
years.  It  was  preceded  as  usual  by  a  steady  and  continuous  drain  of 
gold.  In  December,  1838,  the  Bank  held  of  bullion  £9,790,000.  In 
May,  1839,  this  was  reduced  to  £4 J  17,000;  in  July  to  .£2.980,000,  and  in 
September  to  £2,400,000.  Yet  it  can  scarcely  be  credited  that  up  to 
;May  the  Bank  went  on  making  advances  as  if  matters  were  in  a  normal 
condition. 

This  revulsion,  however,  I  pass  by.  Those  that  succeeded  are  more 
interesting  to  us,  for  two  reasons:  They  all  aff'ected  both  the  United 
States  and  Canada,  and  they  are  more  near  the  events  of  our  own  times, 
and  tluTcforc  carry  more  pregnant  lessons. 

The  Crisis  of  1817. 

Though  this  crisis  acted  with  great  severity  on  the  United  States 
and  Canada  its  chief  force  was  felt  in  England.  So  far  as  Canada  was 
ooncerned,  it  liad  been  preceded  by  the  adoption  of  a  trade  policy  in 
England,  which  had,  for  a  time,  ruinous  eftects  on  Canada.  Sufiicient 
opportunity  for  preparation  had  not  been  given.     It  was  largely  owing 


PANICS  IN  ENGLAND  AND  THE  L'NITED  STATES.     305 

to  this  that  the  crisis  of  1847  was  so  severely  felt.  Montreal  was  pros- 
trate under  the  heavy  blows  inflicted  on  her  prosperity.  Banks  made 
heavy  losses.  The  Bank  of  Montreal  lost  all  its  reserved  fund.  All 
Canada  M-as  more  or  less  affected,  but  it  was  in  the  commercial  capital 
that  closed  warehotisis  and  quiet  wharves  testified  for  years  how  severe 
had  been  tlie  blow. 

The  panic  of  1  817  came  about  in  England  in  this  wise.  During  the 
years  18ir;-l6,  a  perfect  fever  of  Railway  construction  had  been  de- 
veloped all  over  Great  Britain,  and  the  amount  of  money  drawn  for  this 
purpose  from  the  floating  funds  of  banks  and  the  community  gradually 
mounted  up  to  enormous  sums.  Railways  were  supposed  to  have  within 
themselves  a  certain  guarantee  of  inexhaustible  future  wealth,  and  Parlia- 
ment was  besieged  Avith  applications  for  new  schemes.  Prices  of  shares 
were  continually  on  the  rise,  and  for  a  time  everything  was  on  the 
ascendant.  Mercantile  business  became  inflated,  for  everybody  found 
themselves  rapidly  getting  rich.  And  many  bankers  were  carried  away 
with  the  excitement  and  fostered  it  by  free  discounting.  A  high  style  of 
living-  was  entered  upon  by  many  people,  and  establishments  created; 
a  perfect  type  of  which  was  found  in  the  career  of  George  Hudson,  the 
great  railway  promcter  and  operator  of  those  times.  A  few  years  be- 
fore he  had  been  pursuing  a  quiet  business  as  a  draper  in  the  city  of 
York,  and  living  in  a  style  corresponding  to  the  position  of  a  shopkeeper. 
But  in  18i6  we  find  him  a  railway  magnate,  occupying  a  splendid  man- 
sion overlooking  Hyde  Park  in  Eondon,  and  entertaining  the  nobility  of 
the  land.  All  tliis  was  based  upon  the  rise  in  railway  shares  and  was 
kept  afloat  by  masses  of  bills  incautiously  discounted  by  bankers  and 
discount  houses.  All  commercial  transactions  became  infected  with  un- 
soundness and  an  extraordinary  number  of  persons  became  entangled  in 
obligations  of  which  there  was  no  prospect  of  their  ever  working  free. 
These  were  the  conditions  precedent  to  the  great  collapse;  and  I 
know  they  are  correctly  described,  for  I  was  in  England  at  the  time 
ind  an  ej^e- witness  of  them  all. 

The  first  sign  of  the  break-up  occurred  in  the  grain  trade.  In  the 
month  of  August,  1817:,  great  houses  in  this  line  of  business  began  to  fail. 
The  first  had  liabilities  of  £:)00,000.  Other  firms  followed;  some  failing 
for  £300,000,  some  for  £400,000.  One  failure  resulted  in  another, 
and  by  the  end  of  the  third  M-eek  the  failures  amounted  to  £3,020,000. 
The  circle  of  disaster  now  widened  and  spread  through  all  branches  of 
business,  until  the  total  amount  within  a  few  months  reached  the  enor- 
mous aum  of  £15,000,000,  a  sum  fully  equivalent  to  twice  as  much  at 
the  piesent  day. 

So  far  with  regard  to  merchants.  Then  came  the  turn  of  the 
bill  discounters  and  the  banks.  In  was  in  September  that  the  first 
note  was  struck  by  the  failure  of  a  large  firm  of  bill  discounters  in 
London.  Early  in  October  the  Royal  Bank  of  Liverpool  succumbed, 
amidst  tremendous  excit(?ment.  The  failure  of  the  Royal  Bank  was  fol- 
lowed by  the  stoppage  of  the  North  and  South  Wales  Bank.  (This  Bank 
resumed  business,  and  is  in  high  credit  now.)  The  Liverpool  Banking 
Company  and  the  Union  Bank  of  Newcastle  then  followed.  Heavy  runs 
20 


S06  BANKING    AND    COMMERCE. 

also  took  place  on  other  banks,  leading  to  failures  in  Manchester  and  in 
the  West  of  England. 

The  Bank  of  England  had  rendered  assistance  during  this  period 
of  alarm,  notwithstanding  the  fact  that  its  supply  of  bullion  was  rapidly 
being  drained  oft".  But  the  time  Avas  coming  when  it  was  necessary  for 
the  great  Bank  to  look  after  itself.  By  the  operation  of  the  Act  of  184'4, 
a  large  part  of  the  gold  owned  by  the  Bank  was  locked  up  in  the  issue 
department,  as  security  for  its  notes,  and  was  utterly  unavailable  for  the 
claims  of  depositors  and  discounting  customers.  Ordinarily  the  Bank 
had  rbundant  resources  in  bullion  for  all  banking  purposes,  but,  for  more 
than  a  year  back  its  bullion  had  been  steadily  decreasing.  By  the  end 
of  October  it  had  been  reduced  to  such  an  amount  as  to  render  it  impos- 
sible to  go  on  with  its  business.  Tlie  bank  could  not  even  increase  the 
issue  of  its  own  notes;  it  could  not  obtain  them  without  paying  in  gold 
to  the  issue  department,  while  for  that  department  to  issue  them  except 
on  gold  paid  in  would  have  been  to  break  the  law.  Yet  something  must 
be  done,  or  the  Bank  would  stop  payment.  The  Bank  therefore  had 
no  resource  but  to  appeal  to  the  Government,  and  at  length  the  force 
of  circumstances  compelled  the  Government  to  suspend  the  Act,  and 
allow  notes  to  be  issued  (they  were  legal  tender,  let  it  be  borne  in  mind) 
without  a  covering  of  gold. 

When  the  Government  intervened,  the  panic  passed  away  as  had 
that  of  1825  for  the  same  reason.  Business  gradually  resumed  its  ordi- 
nary course.  But  one  of  the  most  important  consequences  of  the  revul- 
sion was  to  dissipate  the  idea  that  the  act  of  1841  could  be  relied  on  to 
prevent  panics.  The  whole  banking  interest  of  the  country,  with  few 
exceptions,  had  shared  this  delusive  idea,  and  conducted  their  operations 
as  if,  since  the  passing  of  the  Act.  nothing  was  to  be  feared  from  im- 
prudent banking,  so  long  as  the  Bank  of  England  stood.  Bankers  in 
England,  even  at  that  late  date,  had  yet  to  learn  that  no  legislative  en- 
actments can  prevent  continued  violation  of  sound  banking  rules  from 
being  followed  by  disaster. 

But  other  revulsions  were  to  happen  before  a  right  understanding 
was  arrived  at,  with  regard  to  bank  issues;  and  nothing  is  more  re- 
markable than  the  misconception  that  pervaded  even  the  mercantile  and 
banking  world  of  London  with  regard  to  this  matter. 

TiiK  Reviti.sion  of   1857. 

The  events  of  this  terrible  financial  revulsion  came  very  close  home 
to  us  on  this  side  of  the  Atlantic,  for,  as  some  now  living  can  remember, 
it  swept  like  a  tornado  over  the  United  States,  and  passed  as  a  deadly 
blight  all  over  the  western  portions  of  Canada. 

Respecting  England,  there  had  been  a  heavy  war  ex)>cnditure  in 
the  Crimea,  and  as  is  often  the  case,  a  development  of  extravagant  living 
attending  it.     A  general  spirit  of  buoyancy  pervaded  the  community. 

The  Bank  rate  in  August,  1856,  was  seven  and  eight  per  cent.,  a 
very  high  rate  for  England.  An  enormous  amount  of  accommodation 
bills  was  set  afloat  in  the  community,  and  even  the  Governor  of  the  Bank 
of  England  observed  not  long  before  the  panic  that  things  were  hopef'il 
and  satisfactory.     Yet  from  June,  1855,  to  December  the  stock  of  bullion 


PANICS  IN  ENGI.AND  AND  THE  UNITED  STATES.     307 

had  gone  down  from  £17,">00,000  to  ,€10,300,000;  and  there  were  signs 
of  the  times  whicli  sage  financiers  were  carefull}^  noting  from  day  to  day, 
and  from  Aveek  to  week.  The  bullion  in  the  Bank  was  only  of  moderate 
amount  at  best.  During  the  period  of  extravagant  living,  there  had  been 
heavy  importations  of  Eastern  luxuries  as  well  as  an  immense  increase  in 
ordinary  importations  from  thence.  These  caused  an  abnormal  accumula- 
tipn  of  debt  to  that  quarter,  which  could  only  be  satisfied  by  shipments  of 
specie.  Accordingly,  a  ^Million  pounds  sterling  was  taken  from  the  re- 
serve of  the  Bank  for  shipment  to  the  East.  This  was  the  beginning  of 
the  diminution  in  the  Bank's  stock  of  banking  specie  which  went  on  until 
it  was  nearly  all  exhausted. 

The  great  centre  and  source  of  disturbance,  however,  was  in  the 
United  States. 

After  several  good  harvests  and  immense  railroad  development, 
largely  financed  on  money  borrowed  from  abroad,  but  partly  on  dis- 
counts at  home,  the  usual  era  of  extravagant  expenditures  set  in.  Follow- 
ing on  this  came  the  bad  harvest  which  prevailed  over  the  United  States 
and  Canada.  The  first  note  of  distress,  as  I  well  remember,  came  from 
Ohio. 

On  August  25th  the  Ohio  Eife  and  Trust  Company  with  deposits  to 
the  amount  of  .ffi.OOG.OOO  stopped  payment.  Tliis  created  a  panic  which 
rapidly  spread  throughout  the  Union.  Discount  rose  to  eighteen  and 
twenty-four  per  cent.  The  extraordinary  number  of  150  banks  in  Penn- 
sylvania, Maryland,  Virginia  and  Rhode  Island  stopped  payment.  On 
October  l.'Uh  a  general  run  took  place  on  the  New  York  banks.  Eighteen 
immcuiately  stopped;  and  soon  afterwards,  out  of  sixty-three,  only  one 
maintained  payment  in  specie. 

A  perfect  avalanche  of  mercantile  failures  resulted  from  these  stop- 
pages and  other  causes  and  for  months  together  several  columns  of  the 
New  York  papers  were  occupied  by  lists  of  firms  that  liad  become  bank- 
rupt. Nothing  like  it  had  been  known  before;  nothing  like  it  has  trans- 
pired since.  We  used  to  read  these  lists  in  Canada  with  very  serious 
uneasiness,  for  at  that  time  the  old  Reciprocity  Treaty  was  in  force,  and 
our  exports  of  Lumber  and  Grain  caused  large  masses  of  bills  to  be  drawn 
on  United  States  firms.  Whetlier  these  bills  would  be  paid  or  not,  was  a 
matter  of  daily  anxiety  to  Canadian  exporters  and  their  bankers. 

The  depression  continued  for  two  or  three  years,  during  which  there 
was  the  severest  weeding  out  of  weak  firms  and  weak  banks  that  had  ever 
been  known;  accompanied  also  by  an  exercise  of  personal  and  domestic 
economy  so  general  as  to  produce  a  heavy  diminution  of  imports,  and  a 
restoration  of  sound  methods  of  giving  and  taking  credit. 

Passing  back  to  England,  the  course  of  affairs  may  be  briefly  sum- 
marized f.s  follows: 

(1)  The  events  in  the  United  States  first  reacted  upon  Liverpool 
and  Glasgow,  then,  as  ever  since,  very  closely  connected  with  American 
firms.  The  Western  Bank  of  Scotland  failed;  naturally  enough,  for  it 
had  been  scandalously  mismanaged.  The  Borough  Bank  of  Liverpool 
also  failed. 

The  City  of  Glasgow  Bank  suspended  temporarily,  but  was  able  to 


808  BANKING    A.ND    COMMERCE. 

resume;  the  most  rem.-irkable  tiling  about  which  is  that  its  Directors  were 
blind  to  this  sharp  lesson,  and  twenty  years  afterwards  perpetrated  the 
most  astounding  series  of  follies  and  "frauds  ever  heard  of  in  the  history 
of  banking. 

(9.)  London  was  first  disturbed  by  the  tremendous  depreciation  in 
American  securities  of  all  kinds,  but  ])articularly  Railways.  These  had 
l>een  carrying  on  an  extravagant  style  of  management,  for  years;  and 
paying  dividends, — practically. — out  of  ca])ital.  Some  eighty  millions 
sterling  of  American  railroad  stock  was  held  in  England,  and  the  effect 
of  dej)reciation  was  far-reaching. 

(3)  Jn  October  failures  began  \o  increase  in  the  country.  Alarm 
spreid  in  all  directions  when  it  was  announced  that  the  great  mercantile 
house  of  Dennistoun  and  Co.  of  London  had  succumbed,  followed  a  few 
days  ?ftcr  by  the  failure  (for  the  second  time)  of  one  of  the  largest  dis- 
counting houses  of  Londjn,  Sanderson  &  Co. 

All  this  time  the  bullion  in  the  banking  department  of  the  Bank  of 
England  was  draining  off,  and  it  went  down  until  on.  November  12  the 
amouTit  of  gold  held  by  the  banking  department  was  only  £'358,000.  The 
whole  of  the  remainder  was  locked  up  in  the  issue  department  and  held 
for  the  notes.  Yet,  holding  only  this  sum  of  less  than  £400.000  against 
the  mass  of  its  deposits,  the  Bank  was  struggling  on  from  hour  to  hour. 
The  London  banks  alone,  at  tliat  date,  had  balances  in  the  Bank  of  Eng- 
land of  more  than  five  millions,  and  could  have  closed  it  up  at  once  had 
they  pleased.  Of  course,  it  would  liave  been  madness  to  do  it.  But  they 
themselves  might  l-.ave  been  compelled  any  day  by  the  claims  of  their 
country  correspondents  to  draw  out  the  whole  of  the  gold  in  the  vaults 
of  the  Bank.*^"  It  is  well  known  that  this  panic  was  stopped,  by  the 
S'.'.spension  of  the  Act  of  1844;  the  second  demonstration  of  the  unwisdom 
cf  the  idea  that  the  Act  would  bring  about  a  wiser  course  of  financing  and 
l^revent  panics  altogether. 

Turning  now  to  Canada,  we  are  confronted  with  a  condition  and 
development  of  a  higli  degree  of  instructive  interest.  (The  description 
which  follows  is  from  my  own  knowledge.)  During  185.")  and  1856,  the 
country  had  enjoyed  a  period  of  remarkable  development,  in  two  ways: 
the  harvest  of  both  years  had  been  singularly  abundant;  and  the  price, 
owing  to  the  Crimean  War,  phenomenally  high:  wheat  having  been  worth 
from  a  dollar  and  a  half  to  two  dollars  a  bushel.  The  total  value  of  each 
of  those  harvests  was  equal  to  three  or  four  average  ones.  The  con- 
sequence was  a  phenomenal  expenditure  u})on  land,  in  the  shape  of  new 
clearings,  buildings,  barns  and  improvements.  This  was  accompanied  by 
a  heavy  rise  in  the  nominal  value  of  lands,  both  cleared  and  wild.  Nat- 
urally following  upon  this,  was  an  extraordinary  impetus  to  the  trade  of 
the  towns,  and  a  heavy  rise  in  the  value  of  town,  city  and  village  property. 

Along  with  this^  came  the  immense  expenditures  connected  with  the 
building  of  the  C'rrand  Trunk  Railway.  Never  had  such  an  outpouring  of 
money  been  known  in  t!ie  quiet  country  towns  and  cities  of  Western  Can- 

82  One  of  the  mnst  noticoable  things  in  the  management  of  the  BanVc  of  Eng- 
land at  that  time  Is  an  apparent  obliviousness  to  the  claims  of  depositors.  If 
any  question  arose,  it  was  always  this — Have  you  enough  money  to  go  on  dis- 
counting? never — Have  you  enough   to  pay  demands   of   depositors? 


PANICS  I\  ENGLAND  AND  Till:  UNITED  STATES.     309 

ada;  and  never  was  tliere  such  extravagant  expenditure  and  speculation. 
Clianipngne  flowed  like  water,  and  a  style  of  dress  and  manners  was 
introduced  that  the  country  had  never  before  known. 

Land  speculation  gradually  increased  until  it  became  rampant.  It 
took  two  distinct  forms.  The  first  related  to  vacant  lots  within  towns 
and  cities,  and  their  suburbs.  The  outskirts  of  every  little  town  were 
surveyed,  to  a  considerable  distance,  and  laid  out  into  streets,  and  building 
lots;  all  with  the  idea  of  an  immense  influx  of  population  and  business. 
The  village  of  one  thousand  was  to  become  a  town  of  ten  thousand ;  the 
town  of  five  thousand,  a  city  of  fifty  thousand, — while  Toronto,  the  seat 
of  Government,  was  to  become  a  citj'  rivalling  New  York.  A  similar 
impetus  was  given  to  Farm  property.  As  to  property  in  wild  lands,  its 
owners  could  set  no  limit  to  what  they  considered  its  value, — for  at  almost 
every  cross-roads  in  the  country,  often  in  the  bush  itself,  surveys  had  been 
made  for  a  future  town  or  citj'.  In  Toronto  nightly  sales  were  held  of 
lands  where  these  future  cities  were  to  be  located ;  the  auction  room  being 
decorated  with  plans  and  pictures  of  future  Town  Halls,  Banks,  and 
mercantile  stores  and  offices.  As  to  farms  adjacent  to  cities,  whose  area 
had  been  surveyed  for  streets  and  lots,  the  speculation  in  these  was  simply 
fabulous.  The  farmer  was  tempted  to  sell  the  whole  to  some  speculator 
at  a  price  that  yielded  him  a  little  fortune.  But  the  speculator  on  dividing 
the  farm,  would  get  a  thousand  lots  out  of  it,  each  of  which,  he  was  will- 
ing to  sell  for  a  hundred  dollars.  These  sales  were  made  on  credit  spread 
over  ten  years  of  time  ;  mortgages  and  promissory  notes  being  given  to 
represent  the  debt.  But  the  purchasers  of  the  lots  did  not  want  them; 
they  sold  them  again;  a  fresh  crop  of  mortgages  and  promissory  notes 
being  the  result  at  higher  figures  until,  as  an  eye-witness  has  described  it: 

"The  simple  hundred  acres  has  been  so  manipulated,  such  convey- 
ances and  promissory  notes  have  clustered  round  it,  that  the  very  cost  of 
conveyancing  has  become  more  than  the  real  value  of  the  land. 

"Carry  this  over  a  wide  area,  appl}'  it  to  every  town,  city  and  village 
in  the  Western  Province  of  Canada;  conceive,  too,  of  all  business  infected 
with  the  same  inflation,  of  an  enormous  mass  of  dealing  on  credit  in  all 
manner  of  extravagan.ces ;  of  people  here  and  there  fancying  themselves 
so  rich  as  to  make  preparation  for  retiring  to  England  and  living  on 
their  estates — and  avc  have  a  perfect  picture  of  the  Canada  of  185.5,  1856 
and  part  of  1857." 

Tliis  picture,  let  us  say,  would  be  just  as  true  of  considerable  por- 
tions of  the  Western  States  at  the  same  period. 

But  h^t  us  pass  oti  and  note  the  turn  in  the  tide: 

"The  harvest  of  1857  was  a  bad  one.  We  had  little  to  export,  yet 
cnorn\ous  importations  had  to  be  paid  for.  Money  became  tight.  Banks 
grew  suspicious.  Lots  ceased  to  be  in  demand,  an  unusual  thing,  and  men 
could  hardly  realize  it.  'Men  clung  with  tenacity  to  the  idea  that  no  matter 
what  miiiht  transpire  in  mercantile  circles,  land  must  go  on  increasing  in 
value.     But  the  logic  of  facts  at  length  dispelled  the  delusion. 

"There  was  a  giadual  bearing  down  through  the  latter  end  of  1857, 
all  of  1858;,  1859  -irid  I860.  During  these  years  failures  became  more 
and  more  numerous.  Men  that  had  fought  against  adversity  bravely  in 
1857  and  1858  were  compelled  to  succumb  in  1859  or  I860,  after  carry- 


310  NANKING    AND    CO^rMr:RCE. 

ing  for  years  a  load  of  obligations.  There  were,  indeed,  instances  where 
failure  ultimate!}'  overtook  men  so  late  as  1S63  and  186i,  the  seeds  of 
which  were  sown  in  the  revulsion  of  1857."''^ 

"If  a  man  had  been  away  from  the  country  during  the  interval  and 
retur/ied.  he  could  not  fail  to  be  struck  with  an  extraordinary  change. 
Numerous  shops  are  closed.  Numbers  of  empty  houses  are  to  be  seen. 
Newspapers  are  full  of  notices  of  sales  of  lands  for  taxes.  If  he  meets 
a  friend  of  former  years,  whom  he  knew  as  a  successful  speculator,  and 
begins  to  talk,  as  before,  of  lands  and  lots,  he  finds  it  to  be  a  tabooed 
subject.  His  old  friend  has  gone  through  terrible  exiDcriences.  He  has 
sued  and  been  sued;  and  has  found  that  while  liabilities  are  tangible 
realities,  assets  in  the  shape  of  instalments  on  land  purchases,  were  a 
mockery  and  delusion. 

"His  mortgages,  if  he  foreclosed,  left  him  only  the  owner  of  thou- 
sands of  acres  of  bush  and  swamp ;  unsaleable,  yet  liable  to  be  taxed.  He 
had  brought  numbers  of  suits,  but  got  practically  nothing.  But  others 
had  sued  him;  and  taken  his  house,  his  furniture,  his  bank  stock,  and  all 
he  had  in  the  world.  Worse  than  this,  he  had  involved  his  friends  and 
relatives  in  the  same  misfortune,  and  had  alienated,  or  made  enemies  of 
them  all.  They  had  endorsed  his  paper,  had  been  sued  in  their  turn,  had 
vainly  endeavored  to  put  off  the  evil  day,  but  finally  had  to  succumb  to 
the  all-devouring  fi  fa  of  the  sheriff,  and  the  hammer  of  the  auctioneer." 

This  graphic  description  of  the  revulsion  of  1857,  in  Canada,  and 
the  inflation  that  preceded  it,  has  been  quoted  for  the  reason  that  both 
are  typical.  What  took  place  in  Ontario  took  place  in  Ohio  and  Illinois.** 
And  what  took  place  in  18.56  to  I860,  has  been  repeated  more  than  once 
in  the  developments  of  subsequent  years.  Every  feature  of  1857  to  1859. 
was  repeated  in  the  great  boom  that  swept  over  Manitoba,  in  1881  and  its 
collapse  ir-.  subsequerl  years;  and  on  a  more  limited  scale  several  times 
since  in  some  of  our  jirinv'ipal  cities.  The  only  difference  between  these 
and  ]8;"7,  was  that  the  area  of  disturbance  was  confined  to  one  city  or 
district. 

P.'iXIC   OF    1866  IN  EXGLAXD. 

It  might  be  supposed  that  after  such  severe  experiences  a  whole 
generation,  at  least,  would  pass  before  another  such  period  could  transpire. 
Yet.  far-sighted  men,  Avithin  a  year  or  two  after  were  anticijiating  that 

83  It  was  during  this  time  of  reaction  that  the  Bank  of  Upper  Canada,  whose 
failure  is  referred  to  elsewhere,  was  forced  to  close  its  doors.  The  bank  had 
been  more  closely  connected  with  the  landed  class  of  the  community  than  any 
other  institution  in  the  country,  and  a  large  portion  of  its  discounts  consisted 
of  their  obligations,  or  the  obligations  of  those  connected  with,  or  dependent 
upon  them.  To  some  extent  the  same  might  be  said  of  one  or  two  small  insti- 
tutions   with    headquarters    in    Toronto,    which   disappeared  about  the  same   time. 

84  The  revulsion  of  1857  swept  with  peculiar  severity  over  Illinois  and  the 
West,  and  a  curious  illustration  of  this  occurred  in  Chicago.  Numerous  failures 
there  resulted  in  numbers  of  mercantile  warehouses  being  left  empty.  The  own- 
ers of  these  were  glad  to  have  them  occupied,  even  if  no  rent  was  paid.  The 
tenant  of  one  of  these  called  on  the  owner  one  day  and  told  him  he  was  going 
to  leave  the  store.  "This  is  rather  unreasonable."  said  the  owner,  "as  I  let 
you  have  this  good  warehouse  for  nothing."  "That  is  very  true."  replied  the 
tenant,   "but  I  oaii  get  a  much  better  one  than  yours  for  nothing!" 


PANICS  JX  P:NGLAND  and  the  united  states.     311 

the  horde  of  specub.t.ors  who  hover  about  financial  centres  would  find 
some  means  or  other  of  bringing  about  another  era  of  inflation.  But  it 
was  not  until  1 863-6 1  that  they  found  their  opportunity.  The  law  of 
limited  liability  had  just  been  passed  (a  highly  beneficial  law  when  used 
properly),  and  under  its  operation  immensely  increased  opportunities 
arose  for  the  floating  of  new  companies.  Up  to  March,  1861',  two  hun- 
dred and  sixty-three  companies  had  been  formed  with  a  nominal  capital 
of  seventy-eight  millions  sterling.  In'  connection  with  these,  vast  sums 
in  bills  were  set  afloat  and  discounted  by  financial  houses  like  Overend 
&  Co.  Yet  in  June,  1  865,  the  rate  of  discount  was  only  three  per  cent. 
Then  the  great  ojierations  began  which  culminated  in  the  panic  of  the 
following  year.  The  Finance  and  Discount  Companies  did  an  enormous 
business  in  loans  and  bills,  finding  thus  the  means  for  the  promotion 
of  credit  enterprises  by  wliich  fabulous  sums  of  money  were  locked  up, 
and  much  of  it  lost. 

Take  the  following  sample  of  the  ojjerations  then  indulged  in: 
The  London  Credit  Company  has  a  capital  of  a  million  and  deposits  of 
two  millions.  With  such  means  at  command,  it  takes  five  thous/ind 
shares  in  the  Financial  Association  of  Paris,  (which  Association  has 
operations  going  on  in  Egyj^t,  Turkey,  and  Russia)  ;  it  loans  a  large  sum 
to  a  company  to  build  docks  at  INIarseilles ;  undertakes  the  construction  of 
a  railway  on  the  Dar.ube,  and  finally  has  to  take  the  railway  itself  in 
payment:  puts  £200,000  into  the  building  of  a  public  hall  in  Milan; 
undertakes  works  of  drainage  in  Belgium;  contracts  for  the  improve- 
ment of  docks  on  the  Thames;  subscribes  for  1,000  shares  in  the  Bank 
of  China  and  Japan;  and  takes  half  a  million  of  a  loan  to  the  Sultan  of 
Turkey.  Another  company  of  a  similar  kind  goes  more  into  Central  and 
South  American  securities,  and  has  money  invested  in  Honduras,  Guate- 
mala, Venezuela,  Chili,  and  Brazil.  Another  fancies  Shipping  and 
Steamship  lines.  And  here  it  was  that  the  great  house  of  Overend, 
Gurney  &  Co.  met  with  the  losses  that  ruined  them.  By  forty  years' 
patient  attention  to  business,  a  capital  of  many  millions  had  been  accu- 
mulated by  the  house.  They  were  Quakers  of  the  very  creme  de  la  creme 
of  the  financial  world,  and  their  credit  was  unlimited.  Their  business 
was  as  large  as  that  of  all  the  banks  of  Canada  put  together.  Yet  in 
two  or  three  years^  under  the  enterprising  management  of  younger  mem- 
bers of  .the  house,  their  immense  fortune  was  dissipated  in  worthless 
loans. ®^  There  never  was  such  a  sensation  as  that  which  shook  the 
financial  world  on  the  announcement  of  the  failure  of  Overend  &  Co., 
JJmited.  Their  liabilities  were  over  £10,000,000.  The  ramifications  of 
their  business  extended  all  over  the  world,  and  the  day  the  failure  was 
made  known  will  long  be  remembered  in  London  as  Black  Friday.  After 
this,  bank  after  bank,  and  company  after  company,  came  toppling  down. 
A  tremendous  drain  took  place  on  the  bullion  of  the  Bank  of  England, 
and  had  it  continued  for  two  days  longer  the  great  establishment  must 
have  closed  its  doors.     Numbers  of  financial  corporations,  however,  did 


85  The  same  condition  of  things  transpired  twenty  years  afterwards  with  the 
house  of  Baring.  It  had  talten  half  a  century  to  build  the  firm  up.  It  only  took 
three  years  for  the  younger  generation  to  pull   it  down. 


312  BAXKIXG    AND    COMMf:RCE. 

suspend  and  were  wonnd  up.     And  again  the  famous  Bank  Act  had  to 
be  suspended  to  prevent  the  Bank  of  England  from  stopping  payment. 
Such  are  the  principal   panics  and  revulsions  that  have  swept  over 
England,  the  United  States  and  Canada,  during  the  last  century. 

Lessons  to  Be  Learned. 

And  noW;  it  may  be  asked,  what  is  the  moral  of  it  all.^  What  use 
is  it  for  the  present  generation  to  dwell  upon  the  record  of  the  follies 
of  the  past,  and  their  punishment?  There  are  various  reasons:  but  the 
principal  one  is,  that  what  has  happened  before  is  undoubtedly  liable  to 
happen  again.  It  is  true  that  we  have  not  had  for  thirt}'  3-ears  past  such 
stupendous  catastrophies  over  a  wide  area  as  those  of  1825  or  18o7,  but 
we  have  had  collapses,  and  reverses  quite  as  severe  in  a  more  limited 
sphere.  The  Blark  Friday  of  Wall  Street,  when  Jay  Cooke  &  Co. 
suspended,  A'as  quite  as  sharp  a  crisis  as  that  which  followed  the  sus- 
pension of  Overend  &  Co.,  in  Lombard  Street,  and  we  have  had  sharp 
lessons  of  the  same  kind  since:  confined,  however,  to  a  limited  area. 
There  has  been  no  general  break-down  of  credit,  affecting  the  whole 
country,  and  characterized  bv  the  failures  of  numerous  banks  and  the 
fall  of  numerous  m.ercantile  houses  of  the  highest  class, — yet  the  return 
of  such  a  convulsion  as  that  of  1857  is  quite  within  the  bounds  of  possi- 
bility. Therefore  the  old  adage,  "Forewarned  is  Forearmed,"  has  a 
pertinent  application  here. 

But  what  is  it  to  be  "forewarned?"  No  banker  can  afford  to  be 
nervous  and  disturbed  at  every  change  that  clouds  the  financial  horizon. 
The  true  course  is  to  learn  from  the  events  of  the  past  and,  with  such  a 
chart  of  past  disasters  before  him,  as  is  contained  in  this  chapter,  every 
banker  (and  every  merchant,  too)  may  ask  himself  the  question:  Is  the 
condi'.ion  of  things  now  prevailing  like  that  which  prevailed  before  the 
great  break-down  of  1857,  on  this  side  of  the  Atlantic,  or  that  of  1847 
or  1825  on  the  other  side?  Is  there  a  great  and  universal  spirit  of  specu- 
lation abroad,  of  a  constantly  increasing  volume,  all  based  on  banking 
credit?  Is  there  a  general  prevalence  of  extravagant  living  (mostly 
based  on  credit,  too)  so  general  as  to  lead  to  unusual  imi^drtations  of 
luxuries  from  abroad?  Is  there  any  sign  that  vast  masses  of  accommoda- 
tion paper  are  being  set  afloat  and  discounted,  unconnected  with  the 
ordinary  currents  of  business?  Are  the  resources  of  the  banks  steadily 
falling  and  continuously  keeping  below  a  safe  position?  These  ques- 
tions are  the  pertinen!;  ones  in  the  case;  and,  on  the  answer  to  them  will 
depend  the  action  that  every  individual  banker  may  take. 

But  it  is  fortunate  that  the  action  of  individual  bankers  will  not  be 
tlie  determining  factcr  in  the  case.  In  this  generation,  there  has  been 
a  remarkable  development  of  the  ]irinciple  of  Association,  and  the  action 
of  one  bank  upon  another,  both  in  the  [Jnited  States  and  Canada.  The 
Association  of  Banks  in  New  York  is  a  great  conservative  power;  so  is 
that  of  the  American  Bankers'  Association  for  the  whole  country;  so 
also  is  that  of  the  Bankers'  Association  of  Canada,  Well-digested  ideas 
of  the  true  methods  of  banking  are  much  more  prevalent  than  formerly. 

But  it  must  always  be  with  bankers  as  a  body  to  resist  any  extensive 
development  of  inflation  that  may   threaten  to   sweep   over  the   country. 


PANICS  IN  ENGLAND  AND  THE  UNITED  STATES.     313 

They  hold  the  purse-strings.  No  matter  how  wild  a  spirit  of  specula- 
tion may  pervade  the  people,  it  cannot  proceed  far  if  bankers  refuse  to 
lend  money  to  foster  it. 

The  whole  fabric  that  comes  crasliing  down  in  times  of  revulsion  is 
based  upon  borrowed  money.  Here  is  where  the  banker's  power  has  its 
scope.  There  can  be  no  borrowing  unless  the  banker  is  willing  to  lend. 
He  holds  the  key  of  the  position.  The  final  issues  are  with  him;  and  it 
is  not  too  much  to  say  that  it  depends  upon  bankers  alone  whether  there 
are  to  be  any  more  panics  and  revulsions. 

Thus  far,  with  regard  to  bankers,  and  the  banking  interest.  But 
turning  to  the  great  public  mIio  are  apt  to  be  carried  away  in  these  times 
of  exciteiLcnt,  there  can  be  no  doubt  that  the  events  recorded  in  this 
chapter  are  well  worthy  of  consideration  by  them.  They  are  full  of 
important  considerations  especially  for  a  younger  generation  of  business 
rnen,  and  may  all  be  summed  up  in  one  pregnant  utterance  of  the  wise 
Solomon:  "He  that  hasteih  to  be  rick,  shall  not  be  innocent."  It  is  the 
hastening  to  be  rich,  especially  by  means  of  operations  foreign  to  a  man's 
own  business,  that  brings  on  the  fever  which  deprives  men  of  their  senses, 
and  ends  in  revulsion  and  ruin. 

And  again  referring  to  the  philosophy  of  the  wise  man  of  Judea, 
it  is  labor  that  brings  the  profit  that  lasts.  To  labor  in  any  one  of  the 
employments  developed  in  these  advancing  times,  so  as  to  be  of  service 
to  the  community,  is  the  true  vocation  of  man  upon  earth.  Such  labor 
is  always  interesting;  sufficiently  exciting,  and  generally  profitable.  And 
if  wealth  by  this  process  is  only  built  up  slowly,  it  is  universally  the  case 
that  there  is  satisfaction  in  the  spending  of  it,  and  a  good  chance  to 
conserve  it  safely  to  the  end,  and  bequeath  it  to  those  that  come  after. 


THE  AUTHOR'S  EXPERIENCES 
IN  FIFTY  YEARS  OF  BANKING 
LIFE  IN  ENGLAND  AND  CANADA 


With  Sheffield  BankiiiK  Company.  1H40  to  1S51.     With  Bank  of  Toronto  as 

accountant  and  manancr.  1856  to  1«76.     (ienoral  ManaReT  of 

the  Merchants  Hank  of  Canada.  1X77  to  I'XIi. 


CHAPTER  I. 

EXPERIENCES  OF  BANKING  LIFE  IN  ENGLAND. 

Introduction   into   Banking— Early    ExrERiENCEs— Cash    Credits- 
Method  OF  Dealing  with  Trade  Bills— Troublesome   Accounts 

Tkansfer    to    Head    Office— Withdrawal    from    Banking    for 

a  Time. 


H 


V^'ING  when  a  boy  shown  considerable  aptitude  for  arithmetical 
calculations,  it  was  decided  that  Banking  should  be  my  occupation 
in  life.  I  entered,  therefore,  a  banking  office  in  Yorkshire,  England, 
at  the  age  of  fifteen,  being  duly  indentured  by  deed,  in  which  I  bound 
myself  to  serve  diligently  and  faithfully  until  I  attained  the  age  of 
twenty-one.  The  bank  into  whose  service  I  entered,  at  their  Rotherham 
Branch,  was  the  Sheffield  Banking  Company,  an  institution  which  from 
the  beginning  has  had  a  continuance  of  able  and  successful  management. 

The  chairman  of  the  board  was  a  gentleman  of  independent  means, 
much  ffivcn  to  studies  in  political  economy;  well  versed  in  the  history  and 
principles  of  banking,  who  had  himself  written  a  treatise  on  "Value;" 
a  subject  much  discussed  by  political  economists  from  Adam  Smith 
downwards. 

Associated  with  him  M\ns  a  board  of  directors  composed  of  men  of 
high  standing  in  the  town,  most  of  them  in  active  business  in  the  steel 
or  iron  trades.  The  most  prominent  of  these  was  a  Quaker,  a  man  of 
considerable  means,  as  will  be  seen  later  on,  whose  distinguished  pres- 
ence, courtly  manners,  and  high  intelligence  impressed  all  who  came  in 
contact  with  him.  Another  director  was  the  head  of  the  well-known  firm 
of  Joseph  Rodgers  and  Sons,  the  great  cutlery  manufacturers. 

The  bank  was  one  of  the  earliest  of  the  joint-stock  banks  established 
after  the  monopoly  of  the  Bank  of  England  was  broken. 

The  business  of  joint-stock  banking  in  England  was  then  in  its  in- 
fancy. Not  much  could  be  learned  from  the  experience  of  the  Bank  of 
England,  whose  foundation  and  methods  Mere  unsuitable  to  be  taken  as 
models  by  any  ordinary  institution.  The  directors  of  the  newly-formed 
banks  in  England  had  therefore  to  "feel  their  way"  somewhat;  for  no 
such  body  of  trained  managers  existed  as  are  to  be  found  there  at  the 
present  day.  Nearly  all  the  banking  of  England,  apart  from  the  Bank 
of  England  itself,  was  in  the  hands  of  private  firms;  but  their  methods 
were  not  altogether  suitable  for  a  joint-stock  bank.  The  partners  in 
these  firms  gave  daily  attendance  at  the  bank,  as  if  they  were  the  heads 
of  a  mercantile  establishment;  and  in  charge  of  the  office  was  simply  a 

315 


316  BANKING    AND    COMMERCE. 

head  clerk,  who  sat  with  the  rest  of  the  employees.  This  latter  feature, 
in  fact,  survived  after  entirely  difl'erent  conditions  were  established; 
and,  in  some  instances,  survives  to  this  day. 

But  this  head  clerk  had  as  a  rule  no  managing  powers  such  as  ap- 
pertain to  the  modern  manager.  One  of  the  partners  generally  signed 
the  name  of  the  firm  to  all  drafts,  bills,  letters,  and  documents,  and 
transacted  business  just  as  a  merchant  would  in  his  own  counting-house. 

But  no  board  of  directors  could  be  expected  to  carry  on  the  business 
of  a  joint-stock  bank  in  this  fashion.  There  was  necessity,  therefore, 
to  appoint  a  Manager  with  signing  powers,  and  also  much  of  the  dis- 
cretion which  a  managing  partner  would  exercise.  And  as  the  chief 
banks  of  Scotland  were  joint-stock  companies,  and,  unlike  the  Bank  of 
England,  were  transacting  the  counnercial  business  of  the  country,  it 
naturally  came  about  that  their  methods  were  adopted  by  this  new  style 
of  banks  in  England,  witli  modirieations  according  to  circumstances. 

The  joint-stock  banks  of  England,  therefore,  having  no  trained  body 
of  experts  to  draw  upon,  and  no  accumulated  stores  of  experience  for 
their  guidance,  had  each  of  them  to  carry  on  the  business  in  the  best  way 
they  could.  Their  success  or  failure,  therefore,  largely  depended  upon 
the  personnel  of  the  directors;  and  some  of  them  made  lamentable  fail- 
ures. Among  the  most  prominent  of  these  were  the  Bank  of  Manchester, 
the  Royal  Bank  of  Liverpool,  the  Yorkshire  District  Bank  and  the  West- 
ern Bank  of  England;  all  large  and  important  institutions  in  their  own 
locality,  and  all  of  whose  failures  were  attributable  to  violations  of  rules 
now  universally  established  in  banking,  but  which  were  then  only  be- 
ginning to  be  evolved  from  the  chaos  of  ideas  on  the  subject.  Others  of 
them,  being  in  the  hands  of  men  ^v}lo  had  made  a  study  of  the  principles 
of  banking,  gradually  established  themselves  in  public  confidence,  grew 
with  the  growth  of  the  community  and  the  development  of  its  trade,  and 
are  strong  and  prosperous  institutions  to  this  day.  Of  this  latter  class 
the  Sheffield  Banking  Company  was  one.  But  it  is  only  right  to  say  that 
a  large  measure  of  this  success  has  been  due  to  the  singularly  able  man- 
agement of  a  man,  who,  entering  the  bank  in  a  subordinate  position, 
rapidly  rose  to  the  highest  place,  which  he  retained  until  his  death  fifty 
years  afterwards.  He  became  known  in  time  all  over  England  as  one  of 
the  prominent  bankers  of  the  day,  and  closed  his  career  of  exceptional 
success  only  a  few  months  before  these  pages  Avere  written. 

Such  was  the  bank  into  whieli  I  Mas  introduced  at  its  Rotherham 
Branch,  as  a  raw  youth  at  the  age  of  fifteen.  This  old  Yorkshire  town 
was  pjirtly  manufacturing,  and  partly  agricultural.  With  its  suburbs  it 
had  a  pojmlalion  of  about  ten  thousand  (now  increased  to  fifty  thousand) 
and  was  the  seat  of  iron  and  steel  -works,  rolling  mills  and  foundries,  all 
of  which  in  a  former  generation  had  belonged  to  one  great  firm,  whose 
business  had   been  developed   from  tl.e   smallest  beginnings,   its   founder 


EXPERIENCES  OF   BANKING   I. HE   IN   ENGLAND.      r^iT 

being  .-i  simple  blacksmith.  They  became  in  time,  bankers  as  well  as 
manufacturers,  but  their  banking  business  was  ultimately  converted  into 
a  joint-stock  company  in  which  form  it  still  continues  as  one  of  the  most 
prosperous  institutions  in  the  North  of  F.ngland. 

The  heads  of  the  great  firm  all  accumulated  fortunes,  gradually 
drew  out  of  the  business,  and  became  country  gentlemen  or  partners  in 
London  banks,  their  foundries  and  rolling  mills  passing  into  the  hands 
of  men,  some  of  whom  had  been  foremen  in  their  shops,  and  others  clerks 
in  their  offices.  These  men,  in  their  turn,  rose  to  a  higher  position,  and 
for  the  most  part  became  the  heads  of  flourishing  establishments. 

The  banking  business  of  these  concerns  was  divided  between  the  two 
banks  of  the  town,  of  which  ours  was  one;  and  during  the  eleven  years 
of  my  connection  with  the  bank,  not  one  of  our  manufacturing  custom- 
ers failed. 

The  town,  however,  had  a  fine  farming  district  round  about  it,  and 
many  wealthy  landowners  and  prosperous  farmers.  One  of  the  largest 
cattle  markets  in  the  North  of  England  was  held  in  it  weekly.  It  had 
also  a  considerable  corn  and  cheese  trade,  as  well  as  flour  mills,  malt- 
houses,  and  breweries. 

The  bank  therefore  had  a  miscellaneous  range  of  accounts,  and  dur- 
ing the  period  of  my  clerkship  there,  I  came  into  contact  with  men  of 
various  occupations,  and  laid  the  foundation  of  experiences  which  stood 
me  in  good  stead  in  subsequent  years.  For  it  was  the  custom  in  those 
days  for  the  heads  of  firms  themselves  to  come  in  person  and  transact 
their  banking  business,  and  if  they  wanted  to  talk  to  the  manager,  they 
often  carried  on  conversation  at  the  counter.  Thus  I  had  the  opportu- 
nity of  liearing  a  good  deal  which  no  clerk  in  Canada  ever  hears.  Men 
whose  names  and  wares  are  well  known  to  this  day  in  the  United  States 
and  Canada  regularlj^  came  to  the  counter  every  Saturday  (the  great 
business  day  of  the  week)  brought  their  bills  for  discount,  and  carried 
away  bags  of  gold  and  silver  in  their  own  hands  for  the  purpose  of  pay- 
ing wages. ^  The  bank  was  a  sort  of  confidential  institution  in  those  days, 
and  they  would  never  entrust  their  busitiess  with  it  to  clerks  and  mes- 
sengers. 

The  manager  had  no  private  room.  But  if  he  required  to  have  a  con- 
fidential talk  with  a  customer,  the  board  room  or  his  own  parlor  was  at 
hand.  Seldom,  however,  was  there  any  use  of  this  room  (apart  from 
board  days)  unless  when  an  account  was  working  irregularly.  Then  the 
manager  would  desire  an  interview  with  a  customer  for  the  purpose  of 
conversing  with  him.  On  the  result  of  this  conversation  would  depend 
whether  his  checks  were  to  be  honored  or  not;  in  fact,  it  might  be, 
"whether  he  was  to  continue  in  business  or  not.  (See  note  at  the  end  of 
this  chaiiter.)-  Flence  the  room  came  to  be  known  as  the  "sweating- 
room."     When  then  on  a  busy  Saturday  it  Mas  intimated  to  some  cus- 


1  It  must   be   remembered  that   no   bank  notes  were  Issued  below  five  pounds. 


318  BANKING    AND    COMMERCE. 

tomer   at  the  counter   that  the   manager   "would  like  to   see   him   in  his 
room,"  wc  clerks  knew  very  well  what  was  awaiting  him. 

Advaxcks  by  Casii  Credits. 

The  7)iodus  operandi  of  the  business  was  largely  founded  on  Scotch 
methods.  Every  customer  who  desired  regular  advances  applied  for  a 
cash  credit.  This,  if  granted,  was  worked  exactly  as  in  Scotland  by  over- 
draft on  current  account.  With  regard  to  these  credits,  three  fixed  rules 
were  observed.  The  first,  that  they  should  not  exceed  in  amount  one- 
tenth  of  the  annual  turnover  of  the  account.  The  second,  that  they  should 
be  entirely  cleared  off  at  least  once  in  each  year.  The  third,  that  they 
should  be  granted  exclusively  by  the  board,  and  on  proper  security.  The 
manager  could  grant  no  such  credit  on  his  own  responsibility;  though  he 
could  discount  trade  bills. 

His  business  w%is  to  see  that  the  advances  were  kept  within  the 
amount  of  the  credit.  He  could  certainly  exercise  a  discretion  as  to 
whether  checks,  which  would  overdraw  it  teiuporarily,  were  to  be  hon- 
ored; but  this  he  did  on  his  own  responsibility.  But  any  customer  whose 
account  was  invariably  up  to  the  limit'and  tending  to  rise  beyond  it,  was 
made  to  feel  that  his  business  was  undesirable. 

We  charged  a  uniform  rate  of  five  per  cent,  on  advances  and  dis- 
counts, and  a  quarter  of  one  per  cent,  in  addition  on  the  debit  side  of  the 
account.  Divided  accounts  were  unknown.  Such  a  thing  as  obtaining  a 
cash  credit  at  more  than  one  bank  was  unheard  of;  and,  if  attempted, 
A'ould  have  been  met  at  once  with  a  request  to  close  the  account. 

Sometimes^  however,  a  casual  discount,  or  the  cashing  of  a  check 
would  be  offered  by  the  customer  of  another  bank  at  a  distance,  and 
some  of  the  troublesome  transactions  of  the  Rotherham  Branch  oc- 
curred in  this  way. 

There  was  a  manufacturing  village  about  four  miles  off.  In  this  vil- 
lage were  situated  the  great  works  of  a  firm  in  the  })orcelain  trade. 
Sometimes  the  astute  heads  of  this  concern  beguiled  our  branch  manager 
into  cashing  a  check  on  their  London  bankers,  which  check  would  some- 
times be  refused.  And  well  do  I  remember  being  sent  over  to  see  these 
people  (living  in  great  style)  on  one  winter's  morning  before  breakfast, 
to  endeavor  to  obtain  pavment  of  a  dishonored  check,  being  expected  to 
be  back  by  the  time  the  bank  opened.  I  did  not  get  the  money.  And  as 
I  had  to  walk  there  and  back,  it  was  a  pretty  severe  experience.  In  the 
same  village  a  general  store  business  was  carried  on  by  a  very  clever  man 
wlio  had  more  ambition  than  capital;  and  had  created  quite  a  sensation 
by  purcliasing  the  fine  residence  and  grounds  of  the  Squire,  and  turning 
the  front  of  the  liouse  into  a  store.  This  step,  however,  proved  his  ruin. 
His  business  expenses  were  now  larger;  so  were  those  of  his  family;  and 
he  was  constantly  short  of  money.  He  kept  his  account  in  the  York- 
shire District  Bank,  at  Doncastcr;  but  he  would  occasionallv  drive  over 


EXPERIENCES  OF   BANKING  LIFE   IN   ENGLAND.      319 

to  our  town  (whicli  Avns  much  nearer)  to  get  a  check  cashed.  This  the 
manager  sometimes  did  for  him.  The  checks  were  generally  paid  ;  let  that 
be  said  to  his  credit.  But  one  day  a  rumor  got  abroad  that  he  had  failed. 
This  proved  to  be  true;  and  the  manner  of  it  came  to  our  ears  a  day  or 
two  afterwards.  His  banking  account  was  almost  constantly  overdrawn. 
The  head  office  at  Leeds,  after  remonstrating  repeatedly  with  the  man- 
ager at  Doncaster,  at  length  ordered  him  to  put  into  effect  a  security 
which  they  held  for  his  advances.  This  security  was  in  the  shape  of  a 
formidable  instrument  called,  I  think,  a  Cognovit,  by  which  they  were 
empowered  without  notice,  to  take  possession  of  his  stock  in  trade  and  all 
that  he  had.  The  manager,  having  received  these  peremptory  orders, 
with  the  Cognovit  in  his  pocket,  drove  over  to  the  village.  On  his  way 
he  met  the  unfortunate  storekeeper,  who  was  driving  over  to  Doncaster 
to  see  him  to  beg  for  time  to  arrange  his  affairs.  The  manager,  on  meeting 
his  customei',  merely  nodded,  and  drove  on.  The  storekeeper  continued 
his  journey  to  Doncaster,  saw  another  official  of  the  bank,  learned  the 
purport  of  the  manager's  journey,  and  drove  hastily  back  to  find  himself 
a  ruined  man,  his  store  closed  up,  and  an  officer  in  possession.  The 
bankers  in  the  neighborhood  generally  thought  this  was  rather  sharp 
practice.  I  think  we  held  a  check  for  some  twenty  pounds  (£20),  but 
the  dividend  was  small,  and  we  lost  the  greater  part  of  it. 

We  had  other  casual  business  from  people  in  the  neighborhood;  but 
never  from  people  in  the  town.  All  their  dealings  with  us  were  in  the 
shape  of  credits,  duly  authorized  by  the  board,  and  secured.  But  occa- 
sionally a  person  in  good  credit  who  did  not  need  regular  advances,  ■would 
drop  in,  and  ask  for  an  advance  of  fifty  pounds  or  so  on  a  promissory 
note.  One  of  these  was  a  landed  proprietor  in  the  neighborhood,  a  jolly 
John  Bull  sort  of  a  gentleman,  whose  borrowings  have  stuck  to  my  mem- 
ory because  of  his  invariable  habit  of  letting  his  bills  be  protested.  But 
he  just  as  invariably  took  them  up  soon  afterwards.  He  was  one  of  those 
oddities,  so  common  in  England,  of  whom  Dickens's  pages  are  full,  and  I 
remember  once,  on  the  manager  reminding  him  that  his  habit  of  letting 
his  bills  go  to  protest  must  cost  him  a  good  deal  of  money,  his  replying: 
"Oh,  I  do  this  on  principle.  I  don't  keep  any  particular  account  of  my 
bilh-.     But  when  they  are  protested,  I  know  I  have  to  pay  them." 

Method  op  Dealing  with  Trade  Bills. 

The  manner  in  which  trade  bills  were  dealt  with  was  diametrically 
opposite  to  that  which  prevails  on  this  side  of  the  Atlantic.  Instead  of 
the  bills  being  submitted  to  the  manager  or  the  board  for  examination, 
some  of  which  might  be  passed,  and  some  thrown  out,  they  were  all 
passed  to  the  credit  of  the  customer  by  the  teller,  just  as  if  they  were 
checks  or  drafts  on  a  bank.  This  might  seem  to  us  in  Canada  or  the 
United  States  a  very  risky  mode  of  doing  business;  but  it  was,  in  fact, 
nothing  of  the  kind.     And  for  this  reason:  all  the  bills  paid  in  to  a  cus- 


320  BANKING    AND    COMMERCE. 

tomer's  credit  were  made  payable  in  Eondon,  and  sent  up  to  our  bankers 
for  collection.  Rarely,  indeed,  were  any  of  these  sent  back  protested; 
for,  if  any  customer's  bills  came  back  often,  he  was  taken  sharply  to 
task,  or  desired  to  close  his  account. 

As  to  any  applications  for  renewals  of  trade  bills,  they  were  never 
heard  of.  If  such  an  ajjplication  had  been  made  it  would  have  dam- 
aged the  credit  of  the  applicant  beyond  redemption.  The  truth  was,  that 
the  bank  -would  keep  an  account  M'ith  no  man  unless  his  bills  were  good 
enough  to  pass  without  being  first  submitted  to  the  manager.  Not  that 
they  Avere  never  scrutinized;  for  they  were  examined  most  carefully  as  to 
their  legality,  the  sufficiency  of  the  stamps,  the  regularity  of  endorse- 
ments, and  so  on. 

Another  fundamental  point  of  difference  was,  that  ordinaril}'  no  limit 
was  placed  upon  the  amount  of  trade  bills  discounted  for  a  customer. 
One  reason  for  this  was,  not  only  the  uniformly  high  quality  of  the  bills 
themselves,  but  for  the  facility  of  rediscounting  in  the  London  money 
market.  Rediscounting  is  almost  unknown  on  this  side  the  Atlantic;  but 
it  was,  at  that  time,  quite  common  for  even  the  best  banks  of  England 
to  send  batches  of  bills  to  the  great  discount  houses  of  London  and  have 
the  proceeds  placed  to  credit  with  their  own  bankers.  There  was,  there- 
fore, no  special  reason  to  impose  limits  to  the  trade  bills.  But  very  care- 
ful and  exact  limits  were  imposed  on  tlie  loans. 

The  system  worked  well,  and  the  high  quality  of  the  business  done 
may  be  gathered  from  the  fact  that  the  losses  of  the  whole  bank  rarely 
amounted  to  over  five  hundred  pounds  a  year.  I  well  remember  the  chief 
manager  once  writing  me,  after  I  had  come  to  Canada  (for  I  correspond- 
ed with  him  until  his  death),  in  a  vein  of  low  spirits  over  the  bad  times 
they  were  passing  through,  and  his  expressing  the  fear  that  the  losses 
of  the  3'ear  would  amount  to  a  thousand  pounds !  Yet  the  bank  did  the 
leading  business  in  one  of  the  largest  manufacturing  districts  of  England. 

The  majority  of  the  accounts  in  the  branch  where  I  served  my  ap- 
prenticeship gave  very  little  trouble.  Trade  was  quiet  but  prosperous, 
and  a  failure  was  a  rarity.  During  the  six  years  I  passed  in  the  branch 
I  do  not  tliink  tliere  were  six  failures  in  the  whole  circle  of  our  custom- 
ers. The  population  and  wealth  of  the  town  have  increased  enormously 
since  then.  Gas-lighted  streets  now  extend  over  the  suburban  country- 
lanes  of  my  early  days.  But  the  characteristic  of  safe  banking  still 
adheres  to  it.  Only  a  few  3'ears  ago,  I  was  once  again  in  the  office 
where  my  early  years  were  passed,  and  the  manager  told  me  he  had  not 
lost  £100  a  year  for  seven  years  back,  and  had  never  had  a  past-due  bill 
in  his  wallet  for  more  than  a  week  during  the  whole  of  that  time.  Yet 
the  branch  had  done  a  very  large  business,  and  must  have  had  credits  out 
at  all  times  of  hundreds  of  thousands  of  pounds. 


EXPERIENCES  OF  BANKING  LIFE   IN  ENGLAND.     ;i21 


Troublesome  Accounts. 

We  had,  however,  during  my  time  a  few  troublesome  tilings  to  deal 
■with,  and  part  of  my  recollections  are  of  copying  out  some  of  those 
formidable  documents  of  security  already  mentioned;  and  also  long  lists 
of  the  chattels  of  a  customer,  whose  stock  we  had  taken  possession  of 
under  one  of  them.  Well  do  I  remember  the  troubles  of  that  old  man  as 
he  stood  at  the  counter  when  "hard  up"  and  begged  the  manager  to  allow 
him  to  exceed  his  credit.  But  he  had  to  fail  at  last,  and  we  to  realize 
our  security.  It  is  interesting  to  relate  how  his  sons,  out  of  the  wreck 
of  their  father's  business,  built  up  one  of  the  largest  manufacturing 
concerns  in  the  district,  and  became  prosperous  and  wealthy  men,  with 
handsome  villas  in  the  breezy  suburbs  just  mentioned. 

^^'e  had  during  that  six  years  two  cases  of  forgery.  One  was  of  a 
casual  customer  for  whom  we  had  discounted  a  few  small  bills,  some 
fifty  or  a  hundred  pounds  in  all.  He  belonged  to  the  class  of  half-gen- 
tleman, half-man  of  business,  of  whom  we  used  to  have  many  represen- 
tatives in  the  early  days  of  Canada,  and  some  of  w^hom  I  afterwards 
had  to  deal  with  in  one  of  the  branches  of  the  Bank  of  Toronto. 

They  were,  as  a  rule,  highly  honorable  men,  but  given  to  live  beyond 
their  means.     But  forgery  was  about  the  last  thing  to  suspect  them  of. 

This  man,  however,  who  lived  with  a  widowed  mother,  a  lady  of  good 
position,  had  fallen  into  the  terrible  temptation  to  forge  bills;  and  well 
do  I  remember  the  consternation  of  the  family  when  it  was  discovered. 

Another  troublesome  customer  (I  dwell  on  these  because  they  were 
typical  cases,  such  as  are  known  by  bankers  everywhere)  was  a  large 
timber  merchant,  with  a  good  business,  very  loosely  managed.  He 
allowed  his  customers  far  too  much  latitude;  and  gradually  got  his  books 
filled  with  what  we  would  call  a  mass  of  "lock-ups."  The  consequence 
was  he  was  always  short  of  money.  I  well  remember  one  day  (it  was 
pay  day  for  his  men)  that  he  came  to  the  bank  as  usual,  begging  for 
money  beyond  his  credit.  On  the  manager  positively  refusing,  he  pulled 
out  of  liis  pocket  a  handsome  gold  watch,  and  begged  for  an  advance  on 
that!  Yet  he  lived  in  good  style,  and  occupied  one  of  the  handsomest 
villas  in  the  neighborhood.  This  style  of  thing,  of  course,  came  to  end 
at  last.  The  bank  demanded  payment  of  his  account,  and  notified  his 
guarantors,  who  were  wealthy  relatives.  They  disputed  the  correctness 
of  our  account,  demanded  proof;  and  well  do  I  remember  the  long 
search  over  stacks  of  vouchers,  which  had  been  filed  away  for  years,  in 
order  to  prove  the  correctness  of  the  final  balance  we  required  them  to 
pay.  We  established  our  case  at  length  and  got  our  money.  He  dis- 
appeared from  the  scene,  and  his  business  was  taken  up  by  the  manager 
of  his  yard,  a  prudent  and  economical  man,  who  built  up  a  splendid  con- 
nection and  fortune  for  himself  out  of  it. 

But  the  long  search  for  these  vouchers  impressed  me  strongly  with 
21 


S22  BANKING    AND    COMMERCE. 

one  of  the  drawbacks  to  the  system  of  advances  by  overdraft  on  current 
account. 

Such  were  some  of  my  earl}-^  banking  experiences,  out  of  which  grew 
object  lessons  well  remembered  in  after  life  when  I  came  myself  to 
occupy  the  position  of  manager  in  that  far-distant  country  of  Canada 
to  which  I  had,  at  that  time,  as  little  prospect  of  going,  as  I  had  of  being 
transported  to  the  moon. 

Transfkr  to  Head  Office. 

A  change  came  at  length.  I  was  transferred  to  the  head  office  in 
Sheffield,  and  bade  adieu  to  the  branch  and  its  associations  with  little 
regret;  for  I  was  to  enter  upon  a  scene  of  greater  activity  in  an  office 
with  an  immensely  larger  number  of  accounts,  where  opportunities  of 
gathering  experience  would  be  much  increased.  Besides  this,  all  the  life 
and  bustle  of  a  big  manufacturing  town  would  be  before  me  every  day. 
In  that  office  I  spent  the  next  five  years,  and  came  into  direct  contact 
with  the  Chief  Manager,  of  whom  I  have  already  spoken,  together  with 
a  number  of  men  who  were  my  superiors  in  ability  and  position.  There 
were  three  cashiers  (or  tellers)  at  the  counter,  and  on  busy  days  four. 
We  had  about  a  thousand  active  business  accounts  in  the  ledgers  as  well 
as  a  considerable  number  of  fixed  deposits.  The  business  was  active  and 
riourishing  even  then  (though  it  has  immensely  increased  since),  and 
altogether  the  change  was,  at  first,  decidedly  agreeable. 

My  work,  however,  was  much  more  monotonous.  In  the  branch  I  had 
to  take  a  hand  in  everything,  except  waiting  at  the  counter.  In  a  small 
way  the  whole  experience  of  a  banking  office  came  before  me;  and, 
althougli  I  did  not  actualh^  perform  the  duty  of  teller,  1  had  plenty  of 
practice  in  assisting  the  manager  to  sort  notes,  count  gold  and  silver, 
arrange  checks  and  drafts,  conduct  correspondence,  and  handle  and 
examine  trade  bills.     The  names  on  some  of  these  I  remember  to  this  day. 

But  in  the  head  office  there  was  a  thorough  subdivision  of  work,  and 
each  man  did  one  thing  only.  I  was  little  better  than  a  junior  in  age, 
but  was  put  in  charge  of  one  of  the  current  account  ledgers,  which  post 
I  retained  until  I  left  the  bank. 

It  was  monotonous  work,  and  at  times  I  fretted  over  it  a  good  deal. 
But  there  was  a  most  important  education  in  handling  these  ledgers,  for 
they  contained  the  whole  of  the  cash  advances  of  the  customers  of  the 
bank.  Jt  was  there  I  learned  the  position  of  all  the  manufacturing 
houses  who  did  business  with  us.  Many  of  the  names  were  known  all 
over  the  world,  and  are  to  this  day,  in  the  United  States  and  Canada  as 
well  as  elsewhere.  Some  of  them  were  wealthy  and  strong  beyond  ques- 
tion, and  kept  far  within  the  line  of  credit  allowed  them.  Most  of  the 
others  were  in  good  position,  doing  a  thriving  business  on  adequate 
capital. 

But  there  were  a   few — a  very   few,  considering  the   number  of  the 


P:XPERIEXCKS   of   banking  life   in   ENGLAND.      3;23 

wl)olc — who  were  evidently  short  of  capital  for  the  business  they  were 
doing.  These  customers  were  always,  financially  speaking,  "on  the 
ragged  edge"  of  their  credit,  often  wanting  to  overdraw,  often  asking 
for  unreasonable  concessions,  none  of  whose  checks  could  be  cashed 
witliout  reference. 

No  system  of  marking  checks  "good,"  was  in  vogue  in  the  town;  but 
we  ledger-keepers  were  expected  to  inform  the  manager  when  accounts 
were  overdrawn.  Tliis,  however,  was  too  much  like  locking  the  door 
after  the  horse  was  stolen  to  satisfy  so  clever  a  manager  as  we  had;  and 
iifter  a  time  he  moved  the  ledger-keepers  to  the  front  of  the  office  (we 
had  hitherto  been  far  away  from  the  counter),  immediately  behind  the 
cashiers,  who  were  instructed  to  hand  checks  to  us  to  be  certified  for 
payment.  Tliis  we  did  generally  from  memory,  and  I  think  I  could 
without  difficulty  have  made  out  from  memory  a  fairly  accurate  state- 
ment of  the  debit  balances  amongst  the  five  luindred  accounts  in  my 
ledger. 

During  the  time  I  was  in  the  head  office  of  the  bank  the  terrible 
panic  of  1 847  transpired.  The  great  features  of  this  panic  are  treated 
of  in  a  separate  chapter;  but  it  is  remarkable  liow  little  it  affected  the 
financial  and  commercial  position  of  Sheffield.  No  great  failure  tran- 
spired in  the  town,  and  the  only  measure  of  a  restrictive  character  taken 
by  the  bank  was  to  Ihtiit  the  time  of  the  trade  bills  discounted.  Yet 
London  was  convulsed  with  agitation.  Great  houses  were  failing  every 
day,  as  I  well  remember  from  the  newspapers  of  the  time,  and  the  Bank 
of  England  rate  of  discount  rose  to  ten  per  cent,  before  the  panic 
abated.  Our  manager  was  one  of  the  country  bankers  who  had  stren- 
uously opposed  Sir  Robert  Peel's  currency  legislation  of  1844.  as  founded 
on  a  mistaken  theory.  Many  of  the  country  bankers  had  ridiculed  the 
idea  that  such  legislation  would  put  an  end  to  panics,  and  their  con- 
tention was  justified  by  the  event. 

Another  event  of  importance  was  the  failure  of  the  leading  private 
banking  firm  of  the  town.  This,  however,  had  no  connection  with  the 
panic.  The  i)artners  had  long  been  the  leading  people  of  the  neighbor- 
hood; the  head  of  the  firm  being  a  ISIember  of  Parliament,  and  the  bank, 
at  one  time,  had  nearly  all  the  business  of  the  district.  But  it  did  busi- 
ness in  a  generous,  old-fashioned  style,  and  got  its  books  full  of  lock- 
ups and  uncoUectable  debts.  Its  downfall  was  inevitable  when  times  of 
competition  set  in;  yet  the  people  of  Sheffield  had  great  confidence  in  it, 
and  its  deposits  and  circulation  were  large.  The  failure  produced  im- 
mense excitement.  But  there  was  no  run  on  the  other  banks.  What 
dividend  was  paid  I  do  not  remember;  but  I  do  recollect  that  we  got  a 
large  accession  of  depositing  customers  and  the  accounts  of  public  bodies, 
and  also  a  few  desirable  accounts  of  manufacturers  and  merchants. 

The  railway  to  Manchester  was  under  construction  at  that  time.  It 
was  a  mere  railway  from  one  town  to  another,  as  nearly  all  the  railways 
in   England  were   in  their   origin.      The   great   combinations   which   now 


324  BAXKIXG    AND    COMMERCE. 

exist  were  then  untliought  of.  This  road  from  Sheffield  to  Manchester 
is  now  a  part  of  a  great  system  stretching  all  the  way  across  England. 
But  it  was  planned  as  a  purely  local  road.  It  cost  an  enormous  amount 
of  money,  as  it  passed  through  a  \ery  hilly  country.  Hardly  a  mile  of 
it  was  on  level  ground.  Its  construction  required  an  inordinate  number 
of  bridges  and  embankments,  and  one  of  the  longest  tunnels  in  the  world 
was  needed  to  enable  the  road  to  burrow  its  way  through  the  great  moor- 
lands that  separate  Yorkshire  from  Lancashire.  Numbers  of  people  in 
Sheffield  had  subscribed  for  the  stock  who  could  not  afford  to  take  money 
out  of  their  business  for  the  purpose,  and  numbers  of  suits  for  calls  were 
the  consequence,  creating  much  local  distress. 

This  produced  the  nearest  approach  to  a  real  tightness  of  money  that 
transpired  during  the  whole  period  of  my  clerkship. 

Five  years  of  my  life  thus  passed.  My  work  in  the  bank  varied 
little,  yet  I  was  daily  becoming  more  expert  in  the  work  of  an  accountant, 
and  forming  habits  of  thorouglmess  and  absolute  accuracy,  together  with 
the  power  of  long  and  concentrated  attention.  And  I  was  learning  to 
discriminate  between  desirable  and  undesirable  customers,  and  to  under- 
stand how  the  profits  of  the  bank  were  made,  and  how  its  losses  were 
avoided;  all  which  stood  me  in  good  stead  in  my  future  career.  I  was 
becoming,  too,  acquainted  with  the  names  and  character  of  most  of  the 
leading  banks  in  the  Northern  and  Midland  counties  of  England,  and 
heard  discussions  on  their  modes  of  doing  business.  The  great  banking 
firms  of  London  were  also  constanth'  before  us,  as  well  as  the  discount 
houses  and  the  Bank  of  England,  with  whose  branch  in  Manchester  we 
used  to  correspond.  And  well  do  I  remember  the  interest  with  which  on 
the  occasion  of  a  holiday  vrsit  to  London,  I  strolled  up  Lombard  Street, 
and  went  into  some  of  the  larger,  banks,  such  as  Glyns,  Barclays,  and 
Smith,  Paj^ne  and  Smith's,  watching  with  eagerness  their  crowded 
counters  and  rushing  business:  little  dreaming  how  familiar  I  should  be 
with  Lombard  Street  at  a  future  day,  in  a  very  different  capacity. 

Though  tlie  Sheffield  manufacturers  did  a  verj'  large  business  with 
the  United  States,  I  do  not  remember  that  we  had  correspondence  with 
any  banks  there.  ]\Iost  of  the  business  was  done  through  Liverpool 
houses  and  particularly  through  the  great  firm  of  Brown,  Shipley  &  Co., 
so  well  known  on  this  side  the  Atlantic.  Of  Canada  I  knew  absolutely 
nothing. 

Temporary  \A'rrHnRAWAL  from  Banking. 

But  at  the  end  of  five  years  circumstances  arose  wliich  made  an 
increase  of  income  absolutely  needful;  and  as  there  was  little  prospect 
of  it  in  the  bank,  and  my  health,  moreover,  being  impaired  by  close  con- 
finement, I  sought  and  found  a  mercantile  position  in  which  I  had  not 
only  a  considerable  accession  of  income,  but  much  employment  in  the 
open   air. 

Thus,  for  a   time   I    left   banking  altogether,   having   had   before    me 


EXPERIENCES  OE   BANKING  LIFE   IN   ENGLAND.      325 

the  invaluable  lesson  of  an  institution  conducted  on  sound  and  well-con- 
sidered principles,  which  led  it  to  a  high  plane  of  success;  which  did  in 
fact,  furnish  n)e  in  after  days  with  a  model  towards  which,  when  the 
responsibilities  of  management  were  placed  upon  me,  I  strove  to  mould 
the  business  with  w^hich  I  had  been  entrusted  in  the  far-off  country 
where  my  future  lot  was  cast. 


2  Referring  to  the  Quaker  gentleman  named  in  an  early  part  of  this  chap- 
ter, a  very  interesting  incident  was  related  to  me  of  him,  not  long  ago,  by  the 
distinguished  chief  manager  of  the  bank  already  spoken  of.  The  incident  affords 
a  striking  illustration,  on  the  one  hand,  of  rigid  adherence  to  lines  of  duty  laid 
down,  and  on  the  other,  of  a  coincident  exercise  of  benevolence  which  was  char- 
acteristic  of   the   man. 

A  certain  firm  in  the  town  had  risen  from  very  small  beginnings  (the  head 
of  it  having  once  been  a  workingman)  into  a  position  of  considerable  prominence 
in  its  own  line  of  business.  The  founder  of  the  firm  had  struggled  in  earlier 
years  to  give  his  sons  a  good  education;  and  they,  in  due  time,  were  taken  into 
partnership.  The  eldest  of  these  was  a  man  of  exceptional  intelligence  and  vigor 
of  character.  Under  him  the  business  gradually  enlarged,  their  capital  grew 
also  to  some  extent,  but  not  so  fast  as  the  rapidly-extending  requirements  of  the 
business  demanded.  For  they  made  very  fine  goods,  and  had  a  splendid  connec- 
tion. They,  at  length,  took  the  important  step  of  erecting  immensely  enlarged 
works;  and  from  that  time  onwards  were  continually  cramped  for  money.  In 
fact,  they  were  rather  in  the  habit  of  neglecting  the  finances  of  the  business  and 
concentrating  their  attention  upon  manufacturing.  Their  account  was  almost  in- 
variably overdrawn;  and  I  have  frequently  seen  this  leading  partner  waiting  at 
the  counter  with  trepidation  to  learn  whether  the  checks  he  had  drawn  for  wages 
to  his  men  could  be  paid. 

The  account  was  one,  therefore,  which,  though  large  and  profitable,  consid- 
erably tried  the  patience  of  the  manager. 

Matters  went  on  in  this  way  for  some  time,  but  at  length  they  came  to  a 
crisis.  Wages  in  the  town  were  invariably  paid  on  Saturday  afternoon;  and  to 
pay  them  was  an  absolute  necessity.  On  one  particular  Saturday,  the  account 
having  for  some  time  been  above  the  authorized  limit,  the  head  of  the  house 
(for  he  had  become  such  by  this  time)  appeared  at  the  counter  as  usual,  and 
presented  a  check  which  would  swell  still  more  largely  the  already  overdrawn  ac- 
count. 

The  manager  strongly  remonstrated;  but  the  party  replied  that  he  must  have 
the  money;  that  he  had  no  other  means  of  getting  it,  he  had  no  more  trade  bills 
to  offer,  that  his  wages  must  be  paid  that  afternoon,  in  default  of  which  the 
firm  must  close  their  works  and  be  ruined. 

Still,  however,  the  manager  was  firm.  But  on  being  further  appealed  to,  he 
said,  "Come  with  me  to  E.  S."  (the  Quaker  director  already  referred  to)  "and 
we  will  see  what  he  says  about  it."  They  went  accordingly,  and  had  a  long  inter- 
view with  him.  What  transpired  was  this,  as  the  manager  told  me  himself.  The 
director,  speaking  in  the  language  used  by  "friends"  at  that  time,  said  to  the 
customer,  "Thou  knowest.  William,  that  the  bank  has  given  thee  a  very  lib- 
eral credit,  and  that  the  manager  has  been  very  indulgent  with  thee  in  allow- 
ing it  to  be  often  overdrawn.  But  he  did  right  to-day,  in  refusing  to  give  thee 
what  thou  wanted.  There  must  be  a  stop  put  to  this  manner  of  conducting 
thy  account.  I  cannot,  and  will  not  take  the  responsibility  of  allowing  the  credit 
to  be  exceeded  further." 

Notwithstanding  the  urgent  entreaties  o  the  customer,  the  director  remained 
firm,  and  there  the  interview  ended.  The  manager  and  the  customer  then  took 
their  departure,  the  latter  terribly  downcast;  for  nothing  but  ruin  was  staring 
him  in  the  face. 

But  just  as  they  were  turning  into  the  street,  the  manager  heard  the  direct- 
or's voi'ce,  calling  out  loudly  to  the  customer,  "William  Thompson,  come  back,  I 
■want  to  see  thee."  He  accordingly  turned  back,  and  the  manager  waited  for  him. 
In  a  few  minutes  he  rejoined  the  manager,  this   time  with  a  smiling  face.      "What 


326  BANKING    AND    COMMERCE. 

did  he  say  to  thee?"  said  the  manager,  for  he  too  was  a  Quaker.     "He  has  lent  me 
a  thousand   pounds  out  of  his   own   pocket,"  he  replied. 

This  crisis  in  the  affairs  of  the  firm  being  got  over,  a  better  style  of  financial 
management  was  introduced.  They  were  never  in  difficulties  again,  and  their 
business  went  on  prospering  and  developing  until  they  became  one  of  the  largest 
firms  in  the  world  in  their  own  line  of  business,  which  they  are  to  this  day.  The 
head  of  the  firm,  the  very  man  who  used  to  stand  supplicating  at  the  bank  for 
money  to  pay  his  workmen's  wages,  died  a  few  years  ago  leaving  an  estate  of 
over  a  million  sterling,  and  this  after  making  munificent  gifts  to  the  town  in  the 
shape  of  a  fine  public  park,  a  very  large  sum  for  local  Improvements,  and  build- 
ing a  range  of  noble  almshouses  for  poor  widows.  His  mansion  is  one  of  the 
finest  residences  in  that  part  of  Yorkshire,  and  in  it  he  once  entertained  the 
Prince  of  Wales.  He  died  lamented  by  the  whole  community  and  has  left  a 
name  which  will  never  be  forgotten  so  long  as  the  town  lasts.  But  I  need  not 
say  his  name  was  not  William  Thompson. 


CHAPTER    II. 

MY  EXPERIENCES  OF  BANKING  IN  CANADA. 

Preliminary — First  Acqi/aintance  With  Canadian  Banking — Em- 
ployed EY  THE  Bank  of  Toronto — Straightening  Out  a  Branch 
— Reyulsion  of   1857- 

AFTER  leaving  the  Sheffield  Banking  Company,  I  entered  the  em- 
-^lIl  ploy  of  a  large  flour  miller  as  cashier  and  traveller.  The  pro- 
prietor had  formerly  been  a  railway  contractor,  from  which  busi- 
ness he  had  retired  with  a  competency.  But  while  carrying  on  his  flour 
mill,  he  entered  the  field  of  railway  construction  on  this  side  of  the 
Atlantic;  undertaking  extensive  operations  in  connection  with  his  partners 
in  New  Brunswick  and  Eower  Canada. 

I  had  charge  of  the  financial  department  both  of  his  milling  business 
and  of  the  contracts;  and  was  ultimateh'  sent  out  to  Montreal,  in  con- 
nection with  the  latter.  J  now  had  the  opportunity  of  seeing  something 
of  the  United  States  for  the  first  time,  and  was  astonished  to  see  such 
cities  as  New  York,  Boston,  Albany,  etc.,  of  which,  with  the  usual  insular 
ignorance  of  a  young  Englishman,  I  had  formed  such  inadequate  ideas. 
In  Slontreal  I  remained  until  his  death  by  shipwreck  brought  the  whole 
business  to  a  close.  During  this  four  years'  experience  I  learned  invalu- 
able lessons,  such  as  I  could  scarcely  have  learned  in  any  banking  office^ 
no  matter  how  extensive  its  business  might  be. 

First  Acquaintance  With  Canadian  Banking. 

It  was  M'hile  conducting  the  financial  affairs  of  this  firm  in  Montreal 
that  I  came  into  contact  for  the  first  lime  with  Canadian  banking.  But 
the  methods  of  a  Canadian  bank  were  wholly  different  from  what  I  had 
been  accustomed  to  in  England,  especially  in  the  matter  of  paying  in 
and  drawing  out  money  across  the  counter;  and  it  was  long  before  I 
became  accustomed  to  them.  The  English  method,  I  thought,  was  much 
more  simple. 

The  mode  of  discounting  trade  bills  was  not  essentially  different,  but 
the  method  of  granting  credits  was  so  absolutely  dissimilar  that  during 
the  whole  time  I  had  to  transact  business  from  the  outside  of  a  bank 
counter  I  never  properly  understood  it. 

I  have  discussed  the  difference  elsewhere. 

I  learned  also  while  doing  business  outside  the  counter,  the  modus 
operandi  of  a  style  of  banking  of  which  I  had  had  no  experience  before, 
namely,  the  negotiation  of  sterling  bills.  The  whole  of  the  financial 
arrangements   of  the   firm  depended    upon  this,  and  I   became   about  as 

327 


328  BANKING    AND    COMMERCE. 

familiar  with  tlie  business  then  as  I  was  in  after  years  as  manager  of  a 
bank. 

The  head  of  the  firm,  however,  was  lost  on  the  steamship  "Arctic." 
His  partners  found  it  impossible  to  raise  the  capital  for  carrying  on  the 
great  contracts  that  had  been  entered  on,  the  Crimean  War  being  then 
in  full  progress,  and  the  money  market  of  England  clouded  over  with 
apprehension.  The  construction  of  roads  was,  therefore,  stopped,  and 
a  large  number  of  officers  of  various  grades,  of  whom  I  was  one,  Avere 
throAvn  out  of  employment.' 

I  was,  of  course,  by  that  time  well  known  in  ^Montreal.  We  had  kept 
our  account,  and  a  very  large  one  it  was,  with  the  Bank  of  British 
North  America.  As  the  financial  manager  of  the  firm,  I  had  become 
acquainted  with  men  whose  names  afterwards  became  prominent  in  the 
banking  sphere,  not  only  of  Canada  but  of  the  United  States.  The 
assistant  manager  was  Mr.  Charles  F.  Smithers,  afterwards  well  known 
as  Agent  of  the  Bank  of  Montreal  in  New  York,  and  subsequently  as 
its  General  Manager.  The  chief  accountant  was  Mr.  E.  H.  King,  who 
Avas  even  then  displaying  those  extraordinary  talents  for  calculation 
which  afterwards  distinguished  him  in  the  higher  sphere  of  General 
Manager.  Little  did  I  dream  at  that  time  how  closely  I  should  be  asso- 
ciated with  these  gentlemen  in  after  life;  and  especially  that  it  should 
be  my  lot  to  take  part,  as  manager  of  another  bank,  in  a  determined 
opposition  to  Mr.  King's  policy  of  revolutionizing  the  currency  system 
of  Canada,  some  twelve  years  afterwards. 

When  the  affairs  of  the  contracting  firm  were  Avound  up,  and  being 
out  of  employment,  my  natxiral  resource  was  to  fall  back  upon  my  own 
profession,  and  seek  a  position  in  a  bank.  IMy  first  application  was  to 
Mr.  Davidson,  who  had  by  this  time  become  General  Manager  of  the 
Bank  of  Montreal,  and  had  taken  over  with  him  Mr.  Smithers  and  Mr. 
King.  He,  however,  gave  me  no  encouragement.  The  bank  was  rather 
restricting  than  extending  its  business  in  consequence  of  the  monetary 
cloud  caused  by  the  Russian  War.  I  had  obtained  an  introduction  to  the 
President  of  the  Commercial  Bank  in  Kingston,  a  bank  which  then  stood 
almost  on  an  equality  with  the  Bank  of  Montreal  in  the  value  of  its  stock 
and  the  business  of  some  of  its  branches.  Well  do  I  remember  calling 
at  the  bank  to  present  my  letter.  The  bank  occupied  a  splendid  building, 
and  all  its  appointments  were  very  fine.  I  was  courteously  received  by 
the  President,  a  distinguished-looking  gentleman  of  the  old  school;  but 
he  gave  me  the  reply,  which  I  subsequently  gave  myself  to  dozens  of  ap- 
plicants, that  they  had  no  vacancy  at  present,  but  would  place  my  letter 
on  file  and   give  it  attention  when   circumstances  called   for  it.      Of  this 

3  In  view  of  subsequent  developments  it  is  interesting:  to  notice  what  those 
contracts  were.  Several  of  them  were  for  lines  that  ultimately  formed  rmt  of  the 
Canada  Pacific  or  the  Grand  Trunk  System,  but.  singular  to  say,  the  firm  had  en- 
tered into  a  contract  to  construct  a  wagon  road,  and  subsequently  a  railroad, 
across  the  Isthmus  of  Tehuantepec  In  Mexico,  starting  from  Vera  Cruz,  and  had 
sent    fiiit   a    party  of  sui-veyors   to  lay  out  the  line. 


MY  EXPERIENCES   OF   BANKING   IN   CANADA.        329 

bank  I  shall  have  something  to  say  later  on;  meanwhile  will  observe,  as 
an  illustration  of  the  changes  time  brings  on,  that  in  that  very  room 
M-here  I  had  stood  as  an  applicant  for  the  position  of  clerk,  I  stood 
twenty  years  afterwards  as  the  General  Manager  of  a  bank  that  had 
succeeded  to  its  whole  business. 

E-MPLOVEn   BY   THE    BaNK    OF    ToRONTO. 

Meantime  I  had  obtained  employment  of  another  character,  and  the 
business  I  had  in  hand  took  me  to  Toronto.  At  that  time  there  was  only 
one  bank  that  had  its  headquarters  there.  I  had  no  introduction  to  any 
of  its  officials,  and  knew  nothing  of  them;  in  fact,  by  this  time  I  had 
given  up  the  idea  of  banking  altogether.  My  re-entrance  into  it  was 
determined  by  one  of  those  accidental  circumstances  which,  apparently 
of  the  most  trifling  character,  sometimes  determine  a  man's  whole  future 
career. 

Talking  one  day  with  a  friend,  he  incidentally  referred  to  a  new 
hank  about  to  be  established  in  the  city,  and  asked  whether  it  would  not 
be  well  for  me  to  seek  a  position  in  it.  He  knew  some  of  its  promoters, 
and  oft'ered  to  give  me  a  letter  of  introduction  to  one  of  them.  I  fell 
in  with  the  proposal.  The  letter  was  given.  The  party  to  whom  it  was 
addressed,  a  respectable  merchant  in  the  flour  trade,  referred  me  to  the 
gentleman  who  was,  he  said,  to  take  charge  of  the  bank  when  it  was 
established.  This  gentleman  was  the  second  officer  of  the  Bank  of 
Montreal  in  the  city.  I  waited  on  him.  He,  however,  gave  me  little 
encouragement;  said  the  affair  was  a  mere  project  at  present;  that  cer- 
tainly a  Charter  had  been  got,  and  subscription  books  opened  in  various 
places.  But  they  were  proceeding  slowly;  very  little  money  was  coming 
in.  and  he  rather  doubted  whether  the  project  would  ever  take  practical 
shape.  He  said  all  this  to  me,  of  course,  "in  confidence";  for  my  letter 
of  introduction  put  me  on  a  confidential  footing;  besides  which  I  gave 
him  as  references  the  names  of  first-rate  people  in  Montreal  whom  he 
knew.  Moreover,  he  said  in  the  usual  way,  that  he  would  "bear  it  in 
mind."  I  called  again,  with  the  same  result,  which  confirmed  me  in  the 
idea  of  abandoning  banking  altogether. 

A  short  time  afterwards,  however,  having  finished  my  business  in 
Toronto,  I  was  preparing  to  leave  the  next  morning,  when  it  suddenly 
occurred  to  me  (little  did  I  think  that  that  accidental  thought  would  in- 
fluence my  whole  future  life)  that  I  might  as  well  go  to  the  Bank  of 
Montreal  and  see  this  gentleman  again.  To  my  surprise  I  found  his 
tone  Avholly  changed.  He  told  me  tliat  matters  had  considerably  pro- 
gressed lately;  that  a  provisional  committee  had  been  appointed,  that 
they  had  leased  an  office  for  business ;  that  he  could  offer  me  the  position 
of  accountant,  provisionally,  and  that  I  might  proceed  to  the  office  and 
open  the  first  books  at  once.  The  salary  offered  was  moderate  enough, 
as  might  be  expected,  far  below  what  I  had  had  in  Montreal;  but  I  ac- 
cepted it  as  a  beginning.     A   few  days  afterwards   I   entered  the  office 


330  BANKING    AND    COMMERCE. 

in  whicli  the  business  of  the  Bank  of  Toronto  was  carried  on  during  the 
first  eight  years  of  its  existence.  And  thus  in  very  humble  fashion  did 
I  commence  my  banking  life  in  Canada. 

In  the  Bank  of  Toronto  I  continued  twenty  years,  in  the  Merchants 
Bank  of  Canada  twenty-five  years  more,  thus  making  with  my  eleven 
years  in  the  Sheffield  Banking  Company,  a  banking  life  of  fifty-six  years 
before  I  finally  retired. 

It  was  on  the  twenty-third  of  March,  1856,  that  I  opened  the  first 
book  of  the  bank  by  entering  up  the  sums  received  to  that  date  from 
subscribers  to  the  stock.  The  whole  amount  was  only  some  twenty-five 
thousand  dollars.  We  could  do  no  banking  business  until  ore  hundred 
thousand  dollars  was  paid  in;  and  at  the  rate  at  which  subscriptions  were 
being  paid,  it  seemed  as  if  a  very  long  time  must  lapse  before  we  could 
commence  banking.  I  was  for  several  months  alone  in  the  office,  con- 
ducting, however,  a  large  correspondence  with  subscribers  or  inquirers, 
tlie  former  being  mostly  requests  for  instalments  to  be  joaid  up  as  speed- 
ily as  possible.  Once  or  twice  I  visited  localities  where  subscribers  re- 
sided, very  much  as  a  commercial  traveller  would  do,  for  the  purpose 
of  collecting  instalments.  One  day  when  I  was  sitting  alone  in  the  office, 
my  good  wife  called  for  me.  Looking  round  upon  the  quiet  place  with  no 
feigns  of  business  visible,  she  said  with  true  wifely  anxiety,  "I  am  afraid 
this  nill  never  be  a  bank!"     And  I  more  than  once  thought  so  myself. 

When  a  young  man  in  England,  a  play  by  one  of  Dickens's  associates 
was  running  its  course,  entitled  "Time  JVorks  Wonders."  There  never 
was  a  more  perfect  illustration  of  it  than  the  career  of  this  bank.  For  as 
I  revise  these  lines  there  lies  on  my  table  the  statement  of  the  bank  for 
the  year  1908  which  reads  as  follows: 

Capital    paid    up $4,000,000 

Rest    (accumulated   reserve   fund) 4,500,000 

Total    assets    39,700,000 

From  this  it  appears  that  its  deposits  are  $26,800,000  and  its  circu- 
lation of  notes  nearly  four  millions  more. 

Who  could  dream  that  I,  as  accountant,  was  ever  employed  in  that 
very  bank,  slowly  entering  moneys  paid  in  on  Capital  Account,  which 
£vmounted  at  that  time  (18o6)  after  months  of  labor,  to  no  more  than 
thirty  thousand  dollars,  and  almost  despairing  that  the  sum  would  ever 
reach  one  hundred  thousand  dollars.  Time  has  certainly  "worked  won- 
ders" in  this  case,  and  illustrated  the  truth  that  "Great  oaks  from  little 
acorns  grow";  and  also  that  men  should  never  despise  the  days  of  small 
things.* 

4  But,  after  all,  the  growth  of  this  bank  is  but  a  type  of  the  growth  of  Can- 
adian banking  as  a  whole.  One  item  of  this  growth  can  be  taken  as  an  illustra- 
tion of  the  whole.  At  the  time  of  which  I  am  writing,  the  deposits  of  all  the 
banks  unitedly.  Savings  Banks  Included,  in  tlio  whole  country  now  called  the  Do- 
minion of  Canada,  were  not  more  than  fifteen  millions  of  dollars.  The  same 
Item,— that  Is.  of  deposits  of  banks  of  all  kinds,  together  with  those  of  loan  com- 


MY   EXPERTFAXES   OF    BAXKTXG    TX    CAXADA.         331 

Subscriptions  continued  to  come  in  slowly,  but  towards  the  middle 
of  summer,  strenuous  measures  were  taken  ])y  the  Provisional  Commit- 
tee to  work  u})  the  amount  paid  in  to  $100,000  so  as  to  enable  the  bank 
to  commence  business  before  the  great  crop  movement  of  the  fall  season 
began.  Their  efforts  were  successful.  The  required  amount  was  ob- 
tained, and  the  bank  was  in  a  position  to  ojx-n  for  business. 

Previously  to  this,  however,  a  very  imjiortant  step  had  been  taken 
bv  the  gentleman  chosen  as  the  future  cashier.  To  understand  the  bear- 
ing of  this,  however,  it  is  necessary  to  go  back  a  little. 

The  project  of  the  bank  originated  with  a  few  men  in  Toronto  and 
the  neighborhood,  all  of  whom  were  millers  or  in  the  grain  trade,  who 
took  the  step  because  of  the  utter  indisposition  of  the  Bank  of  Upper 
Canada  to  af!"ord  facilities  for  moving  the  crops  and  i)urchasing  grain. 
The  branches  of  the  Montreal  banks  were  not  well  affected  to  this  line 
of  business  either.  They  preferred  the  accounts  of  wholesale  importers. 
These  millers  were  men  of  sufficient  standing  to  secure  a  Charter  and 
start  subscriptions.  They  determined,  however,  to  keep  the  control  of 
the  future  bank  in  their  own  hands.  A  well-known  and  prominent  miller 
was  to  be  President.  It  was,  in  fact,  often  popularly  spoken  of  as  the 
"Millers'  Bank."  But  when  overtures  were  made  to  the  officer  of  the 
Bank  of  ^Montreal  before  mentioned,  he  demurred  to  this  feature  of  the 
business,  and  finally  stipulated  for  two  things:  first,  that  the  President 
must  be  a  man  of  independent  means  and  out  of  business;  and,  second, 
that  half  the  remainder  of  the  board  should  be  men  connected  with  gen- 
eral mercantile  business  and  not  with  the  grain  trade. 

The  suggestions  created  considerable  commotion  amongst  the  original 
promoters,  for  it  was  evident  that  some  of  them,  who  were  looking  to  be 
directors,  must  be  passed  by.  There  was,  however,  no  alternative.  A 
president  was  sought  and  found  of  the  character  described,  and  several 
mercantile  men  cf  good  standing  agreed  to  accept  positions  on  the  board 
when  it  was  constituted.  So,  then,  when  the  required  capital  was  paid  in, 
a.  meeting^  of  shareholders  was  held,  a  board  and  president  were  elected, 
the  cashier  formally  appointed,  and  the  bank  in  July,  1856,  opened  its 
Joors  for  business. 

The  bank  being  now  ready  for  business  something,  must  be  said  of  the 
men  who  had  to  carry  it  on,  both  at  the  head  office  and  the  branches. 

The   president,   as   has   been   said,   was   a    gentleman   of   independent 


panics  (which  did  not  tlien  exist),  amounts  now.  according  to  published  returns, 
to  over  six  hundred  millions!  In  fact,  the  deposits  of  the  Bank  of  Toronto  alone, 
at  the  present  date,  amount  to  more  than  those  of  the  whole  of  the  banks  of  the 
country  put   together  when   it   commenced   bu.siness. 

5  At  this  meeting  a  very  notable  statement  was  made  by  an  old  resident  of 
Toronto,  the  Hon.  Henry  John  Boulton,  whose  recollection  went  back  to  the 
time  of'  the  founding  of  the  Bank  of  I'pper  Canada.  He  said  that  the  charter 
■of  that  bank  provided  that  fifty  thousand  pounds  currency  ($200,000)  must  be 
paid  up  before  commencing  business;  that  the  amount  had  been  subscribed, 
the  whole  of  what  is  now  Ontario  warmly  supporting  the  project;  but  that, 
when  it  came  to  THE  PAYING  IN  OF  MONEY  it  was  impossible  after  the  most 
strenuous    exertions    EXTENDING    OVER    THE    WHOLE    OF    UPPER    CANADA 


332  BANKING    AND    COMMERCE. 

means.  He  had  been  a  bank  director  before — vice-president,  I  think,  of 
the  Bank  of  Upper  Canada — an  exceedingly  shrewd  and  capable  man, 
well  esteemed  in  the  community,  of  a  cautious  temperament;  in  fact,  one 
of  the  kind  of  men  who  are  supposed  to  have  "a  bad  opinion  of  every- 
.  body  in  general."  But  he  was  a  courteous  gentleman  after  all,  and  ren- 
dered most  valuable  service  to  the  bank. 

The  cashier  was  from  the  North  of  Scotland,  and  had  many  friends 
and  connections  amongst  the  circle  of  Hudson  Bay  Company  officers, 
many  of  whom  became  stockholders  through  his  influence.  He  was  a 
thorougidy  trained  banker,  had  gone  through  the  grades  in  the  Bank  of 
Montreal,  and  was  jierfectly  familiar  with  the  methods  of  that  bank,  both 
in  office  management,  and  in  its  dealings  with  customers.  He  was  also 
familiar  with  the  mode  in  which  its  branches  were  governed.  A  man  of 
great  natural  ability,  he  would  no  doubt  in  time,  had  he  remained  in  the 
Bank  of  Montreal,  and  lived,  have  risen  to  the  highest  position.  As  it 
was,  it  was  his  influence  and  that  of  the  president,  and  the  policy  they 
introduced,  that  enabled  the  bank  to  survive  the  storm  which  broke  over 
the  country  with  such  violence  in  the  following  year. 

Had  the  original  promoters  been  in  charge  of  the  bank  at  that  time. 
I  am  very  sure  it  would  have  gone  down  in  the  general  wreck  that  ensued 
all  over  Upper  Canada. 

I  must  also  say  a  word  with  regard  to  the  men  who  were  placed  in 
the  branches. 

The  bank  had  been  established  on  a  principle  which  sounds  rather 
curious  in  these  days.  It  being  from  the  first  intended  to  establish 
branches,  a  subscription  book  was  placed  in  the  hands  of  some  prom- 
inent man  in  various  tow-ns  of  Upper  Canada,  with  the  promise  that  if  he 
obtained  a  certain  amount  of  stock,  he  should  be  appointed  agent  of  the 
bank.  At  that  time  it  was  quite  customary  in  Canada  (as  it  is  now  in 
the  country  parts  of  Scotland)  for  the  agent  in  charge  of  a  branch  bank 
to  carr}^  on  a  business  of  his  own. 

In  several  towns  the  requisite  amount  of  stock  had  been  secured;  and 
so  it  came  about  that  all  the  branches  were  at  first  in  charge  of  men  Avho- 
had  no  practical  knowledge  of  banking.  One  was  a  prominent  lawyer, 
another  the  sheriff'  of  the  district.  Another  agent  was  a  country  gentle- 
man, and  a  fourth  a  prominent  grain  merchant. 

to   raise   more   than    forty   thousand    pounds  ($160,0€0)  and   tliat  the  balance  had  to 
be    borrowed    from    the    military    chest    of    the   Government! 

No  general  Banking  Act  existed  at  that  time  in  Canada.  Each  bank  was 
constituted  by  a  separate  act  of  Parliament.  But  the  general  provisions  of  these 
acts  were  alike,  and  were  largely  modeled  upon  the  charter  of  the  banks  of  the 
State  of  New  York.  (These  had  owed  their  origin  to  the  careful  elaboration  of 
that  most  able  of  all  American  financiers,  Alexander  Hamilton.)  Many  of  the 
provisions  of  these  separate  acts  are  now  incorporated  in  the  present  Banking 
Act;  but  in  one  point  there  Is  a  fundamental  difference;  that,  namely,  which 
provides  for  securing  the  circulation.  At  that  time  there  was  no  security  for 
circulation  at  all,  the  only  regulation  about  it  being  that  it  should  not  exceed 
the  paid-up  capital,  plus  the  gold  and  silver  coin  on  hand.  The  last  provision 
was  no  security  for  the  notes;  for  the  note  holders  had  no  better  claim  to  it 
than    the   depositors. 


MV   EXPERIENCES   OF    BANKING    IN    CANADA.         333 

All  these  men  were  displaced  as  time  vent  on;  and  I  niijiflit  as  well  at 
this  point  tell  of  the  exjjerienee  we  had  with  them.  The  lawyer  was  a 
most  respectable  man,  and  s])eedily  gathered  a  good  connection  about 
his  branch.  But  in  less  than  six  weeks  his  returns — as  we  call  the 
statements  sent  by  branches  to  the  head  office — contained  so  many  mis- 
takes that  the  cashier  sent  me  up  one  afternoon  to  examine  his  books. 
They  were  in  a  perfect  tangle,  and  it  took  me  all  night,  literally,  to 
straighten  them  out.  It  was  about  six  o'clock  in  the  morning  before  the 
task  was  finished,  and  I  had  to  leave  at  seven  to  return  to  town.  The 
agent,  of  course,  was  changed  at  cnee;  but  as  lawyer,  he  continued  to  be 
our  confid(  iitial  adviser  in  the  town,  and  rendered  most  valuable  service 
to  the  bank. 

Our  experience  with  the  sheriff  was  of  a  somewhat  similar  char- 
acter, but  on  a  far  more  extended  scale.  He  had  gathered  quite  a  good 
business  about  the  office,  and  his  returns  and  statements  were  all  in 
order,  so  far  as  outward  appearances  went.  But  at  the  end  of  a  year 
it  was  deemed  desirable  to  have  the  branch  inspected.  The  work  was 
undertaken  by  the  president,  who  took  me  with  him  as  an  accountant  to 
examine  the  books  and  cash,  while  he  attended  to  the  discounts  and  loans. 
The  cash  appeared  to  be  all  right;  but  the  books  did  not  balance.  I 
spent  the  day  in  vainly  endeavoring  to  find  a  place  where  a  correct  bal- 
ance could  he  struck,  but  could  find  none.  It  was  now  evident  that  a  con- 
siderable amount  of  examination  was  before  me,  and  the  president  re- 
turned home.  The  iipshot  of  the  affair  was  that  it  took  me  six  weeks  of 
continuous  labor,  both  in  bank  hours  and  long  after,  before  the  books 
could  be  straightened  out,  some  of  them  having  practically  to  be  re- 
written from  the  beginning.  Of  course  the  agent  was  changed  at  once, 
and  the  branch  placed  in  charge  of  a  young  man  recently  arrived  from 
Scotland.  He  had  a  good  bank  training  there,  and  was  altogether  one 
of  the  cleverest  men  I  ever  met  in  the  banking  sphere. 

In  the  branch  of  which  the  agent  was  a  merchant  it  was  found  that 
large  advances  were  being  made  to  his  own  firm,  a  state  of  things  that 
it  was  utterly  impossible  to  continue.  Business  by  that  time  had  become 
very  cloudv  and  difficult  everywhere;  and  it  was  thought  on  the  whole 
best  to  close  this  branch  altogether. 

Straightening  Out  a  Branch. 

The  branch  i^laccd  under  the  charge  of  a  country  gentleman  very 
speedih'  did  a  flourishing  business;  and  as  he  had  had  some  commercial 
education,  there  was  never  anything  wrong  with  his  books  or  cash.  He 
was  a  man  of  popular  manners,  of  the  "Ilail  fellow,  ■vvell-met"  style, 
ready  and  willing  to  accommodate  borrowers  of  all  sorts  and  conditions, 
and  speedily  did  bv  far  the  largest  business  of  any  of  our  branches.  He 
made  large  profits,  and  for  a  time  it  seemed  as  if  we  were  to  be  con- 
gratulated on  having  secured  so  active  and  enterprising  a  manager. 

But  after  a  vear  or  two,  the  fears  of  the  cashier  were  aroused  bv  the 


334  BANKING    AND    COMMERCE. 

extraordinary  number  of  renewals  that  were  passing  througli  the  branch. 
Correspondence  followed,  and  finally  the  agent  had  to  resign.  I  was 
sent  to  succeed  him,  and  again  another  task  of  straightening  out  fell  to 
my  lot,  not  of  hoohs  this  time,  but  of  business.  About  this  I  say  some- 
thing in  the  next  chapter.  Meantime  I  dismiss  the  agent  with  the  re- 
mark that,  in  the  process  of  straightening  out,  the  whole  of  his  profits 
were  absorbed  by  entries  for  losses. 

The  business  of  the  head  office  wider  the  able  luanagement  of  the 
cashier  rapidly  developed.  We  had  naturally  a  good  connection  amongst 
men  in  the  grain,  flour  and  cattle  trades ;  and  in  addition  a  few  accounts 
of  importing  merchants.  A  share  of  one  of  the  largest  of  these  also 
fell  to  our  lot;  and  was  very  profitable.  So  passed  the  first  year,  at  the 
end  of  which  we  reported  good  ]n-ofits  to  the  stockholders,  and  declared 
a  good  dividend. 

But  at  this  meeting  (July,  18570  another  step  was  taken.  There  had 
been  a  good  deal  of  friction  in  the  board  between  the  old  and  new  ele- 
ments. And  the  latter,  who  had  the  balance  of  power,  determined  to 
put  an  end  to  it  by  dropping  out  one  or  two  of  the  original  promoters. 
The  proposal  created  immense  excitement,  and  I  well  remember  what  a 
stormy  meeting  ensued.  But  the  president  was  firm.  It  M-as  really  his 
policy,  and  the  uncongenial  elements  were  replaced  by  others  that  had 
very  largely  to  do  with  the  subsequent  prosperity  of  the  bank. 
Revulsion  of  1857. 

Shortly  after  this  the  revulsion  of  1857''  transpired  in  Canada,  fall- 


6  The  revulsion  of  1857  affected  the  United  States  more  severely  than  it  did 
Canada,  and  prostrated  business  in  Western  cities  particularly.  The  first  stroke, 
as  is  well  known,  came  from  Ohio  in  the  failure  of  a  Trust  Company.  Chicago 
suffered  as  severely  as  Toronto,  and  the  value  of  real  estate  was  almost  annihi- 
lated. 

It  was  while  this  period  of  depression  was  passing  over  us,  that  the  cashier 
called  me  into  his  room  one  day  and  made  a  rather  remarkable  announcement, 
namely,  that  his  father-in-law,  Sir  George  Simpson,  had  been  speaking  to  him 
of  a  project  to  transfer  the  headquarters  of  the  Hudson  Bay  Co.'s  business  from 
Fort  Gany  (Winnipeg)  to  St.  Paul,  Minnesota.  In  connection  with  this,  Sir 
George's  idea  was,  to  establish  a  bank;  and  he  had  suggested  that  if  the  project 
was  carried  out,  he  (the  cashier)  should  take  charge  of  it  as  manager.  In  that 
case,  the  cashier  added  he  would  like  me  to  accompany  him  there  as  account- 
ant. 

I  well  remember  his  saying  to  me  in  this  conversation,  that  there  was  a 
"small  place,  a  few  miles  beyond  St.  Paul,"  called  "The  Falls  of  St.  Anthony." 
that  tho  bank  would  probably,  after  a  time,  open  a  branch  there,  and  that  he 
would  give  me  charge  of  it.  This  conversation  was,  of  course,  merely  entered 
upon  to  give  me  an  opportunity  of  considering  whether  I  would  like  to  transport 
my.solf  and  family  to  such  a  far-away  region  as  Minnesota  then  was,  in  case  the 
project  was  carried  out.  However,  it  never  was,  owing  to  the  death  of  Sir 
George  Simpson  a  short  time  afterwards.  And  I  do  not  know  that  the  Cashier 
would  have  broken  up  all  his  connections  in  Canada  and  gone  to  St.  Paul  even 
if  it  had:  or  whether  I  would  have  accompanied  him  myself.  But  I  have  often 
since  thought  of  THE  SMAI>L  PLACE  CALLED  THE  FALLS  OF  ST.  AN- 
THONY, now  the  great  city  of  Minneapoli.'?,  and  wondered  what  would  have  been 
my  future,    had  my   lot  been    cast  there. 

With  Minneapolis  I  became  very  familiar  in  after  years  when,  as  General 
Manager  of  the  Merchants  Bank,  I  had  to  supervise  extensive  loans  on  warehouse 
receipts  we  made  from   lime  to   time  there. 


MY   EXPERJENXES   OF    BANKING   IN    CANADA.         .'iJ5 

ing  with  terrible  severity  upon  Ontario.  The  harvest  was  bad.  Money 
became  tight.  There  was  no  panic;  but  a  steady  bearing  down  that 
crushed  men  with  the  irresistible  force  of  an  iceberg  upon  an  imprisoned 
ship.  The  fullest  force  of  the  revulsion  was  felt  in  Toronto.  Our  cus- 
tomers began  to  fail.  To  the  president  and  cashier  came  the  constantly 
repeated  and  wearv  task  of  interviewing  customers  in  difficulties.  To  me 
fell  the  laborious  making  out  of  long  lists  of  protested  bills,  and  writing 
of  letters  requesting  payment,  or  threatening  suit.  We  had  a  portion  of  the 
account  of  the  largest  Avholesale  house  in  the  country.  They  struggled 
hard;  but  failed  at  last,  and  nearly  all  their  paper  went  to  protest.  It 
was  years  before  this  was  all  settled  up;  and  this  after  endless  interviews 
and  correspondence;  taking  security  and  giving  time  to  some,  using  short, 
sharp  and  decisive  measures  with  others — a  wearisome  time  indeed  that 
dragged  on  for  years,  during  which  the  sickening  business  of  making 
more  and  more  provision  for  bad  and  doubtful  debts  had  to  be  gone 
through  periodically.  Every  year  seemed  worse  than  the  last;  and  when 
it  was  going  to  end,  none  of  us  could  tell.  Harvests  were  continually 
bad  in  Ontario,  and  so  long  as  that  continued  there  was  little  hope.  In 
some  of  the  streets  of  Toronto  every  other  store  seemed  to  be  to  let; 
and  for  myself  I  almost  despaired  of  what  was  to  become  of  my  growing 
boys. 

Montreal  was  not  nearly  so  much  aifected  as  Toronto.  The  Grand 
Trunk  Railway  had  brought  about  a  great  diversion  of  business  in  its 
favor,  formerly  done  in  Toronto.  And  there  had  never  been  any  of  the 
wild  speculation  in  lands  that  had  swept  over  Upper  Canada  like  an 
epidemic.  But  Toronto  was  struck  with  a  tornado.  A  prominent  Mont- 
real merchant,  well  known  to  me,  who  did  a  large  business  with  that 
city,  declared  to  a  friend  about  that  time  (1858)  that  there  were  not 
three  solvent  men  left  in  the  citj' — a  gross  exaggeration  of  course — but 
well  reflecting  the  views  of  one  who  was  a  creditor  of  too  many  insolvent 
estates  in  the  Western  country. 

During  all  this  time  the  bank  held  bravely  on.  The  ship  w\as  in 
skilful  hands,  and  they  steered  her  wisely  through  the  long  period  of 
troubled  waters.  Many  of  our  customers,  too,  held  up  bravely,  and 
there  were  some  lines  of  business  that  were  not  much  affected  by  the 
hard  times.  We  managed  to  make  our  dividend  every  year,  but  that  was 
all.  All  extra  profits  were  swept  remorselessly  into  the  gulf  of  "Bad 
and  Doubtful  Debts,"  which  is  the  dread  of  all  bankers  in  such  times. 
But  the  bank  was  never  in  the  slightest  trouble.  Available  resources 
were  always  sufficient.  And  so  w^e  went  on,  meeting  every  day's  emer- 
gencies as  they  arose,  hoping  and  waiting  for  better  times. 

They  came  at  length  in  the  shape  of  better  harvests.  But  before  that 
time  I  had  been  transferred  from  the  head  office  to  the  management  of 
the  branch  formerly  described  as  under  the  charge  of  a  country  gen- 
tleman. 


CHAPTER  III. 

MY  EXPERIENCES  AS  A  BRANCH  MANAGER. 

Origin  of  a  Loan — A  Kind-Hearted  Sheriff — An  Insolvent  Trader 
— Value  of  Second  Mortgages — A  Judgment-Proof  Endorser 
— Appointed  Cashier  of  the  Bank  of  Toronto. 

THE  town  to  which  I  was  sent  was  one  of  the  most  beautifu]l> 
situated  in  Western  Canada.  In  this  town  and  its  neighborhood 
many  persons  lived,  of  the  class  I  have  spoken  of  elsewhere ;  half- 
gentleman  and  half  man-of-business.  The  former  manager  was  intimate 
\vith  this  class,  and  most  of  them  did  business  with  us.  There  was  a  very 
"clannish"  feeling  amongst  them.  They  visited  a  good  deal  together,  and 
endorsed  freely  for  one  another.  The  office  was  full  of  transactions  of 
this  kind;  and  it  seemed  to  me  for  a  time  as  if  everybody  in  the  town 
was  on  everybody's  paper.  To  get  to  the  bottom  of  such  a  maze  of  en- 
tanglements seemed  hopeless,  but  I  plodded  on,  w^eek  after  week,  and 
month  after  month,  like  a  man  clearing  a  piece  of  "bush"  or  weeding  a 
choked-up  garden.  My  chief  anxiety  was  to  avoid  pulling  up  any  good 
plants  along  with  the  weeds,  for  there  was  much  good  business  in  the 
office.  The  great  difficulty  was  to  find  out  who  was  really  the  responsible 
party  on  much  of  this  paper,  and  who  would  acknowledge  his  obligation 
to  pay  it.  In  fact,  it  seemed  to  be  a  matter  of  surprise  in  the  town  that 
Ihe  bank  should  ever  want  payment  at  all.  They  thought  we  ought  to 
be  satisfied  with  the  interest,  and  even  this  was  seldom  paid  in  money. 

Origin  of  a  Loan. 

Let  the  following  be  taken  as  a  sample  of  many  of  the  transactions 
of  the  office.  A  note  made  by  a  storekeeper  was  in  the  circle  of  dis- 
counts, and  after  renewing  it  once  or  twice,  with  small  payments  (all  I 
could  get),  I  asked  our  customer  what  was  the  origin  of  it,  as  it  did  not 
seem  to  be  founded  on  business.^  "Oh,  well,"  said  he,  "the  origin  of  it 
was  this :  times  have  been  pretty  hard  for  some  time,  as  you  know.  One 
day  I  was  very  hard  up,  and  walked  over  to  a  neighbor,  a  storekeeper 
like  myself;  'John,'  said  I,  'wouldn't  you  like  some  money.?'  'Well,' 
he  said,  'a  man  can  always  do  with  money.'  'Well,  then,'  I  said,  'you 
make  a  note  and  I  will  endorse  it,'  or,  'I  will  make  a  note  and  you  en- 
dorse it.'  He  consented;  and  we  both  signed  the  note.  I  brought  it  to 
tlie  bank,  got  it  discounted,  and  we  divided  the  money  between  us.  That 
was  tlie  origin  of  the  note,  and  we  have  been  carrying  it  on  ever  since." 
33G 


MY   EXPERIENCES  AS  A  BRANCH   MANAGER.  337 

Of  such  notes  the  bill  case  of  the  oflice  was  full.  There  must  have 
been  scores,  if  not  hundreds  of  them;  and  the  task  of  interviewing  the 
l)&rties,  corresponding  with  them,  in  many  eases  suing  and  getting  judg- 
ment against  them,  was  wearisome  beyond  description.  For  many  of  the 
parties  to  the  notes  defended  the  suits  for  time,  and  put  us  to  heavy 
expense  for  law  costs. 

A    KiXD-HeARTEI)    SllKRIFF. 

A  singular  discount  account  was  that  carried  on  by  the  sheriff  (not 
the  gentleman  mentioned  in  the  last  chapter)  a  most  respectable  man, 
and,  though  a  sheriff,  one  of  the  kindest-hearted  men  I  ever  knew.  In 
the  bad  years  succeeding  1857  he  had  had  numerous  judgments  to  en- 
force against  farmers  in  the  district.  Reluctant  to  sell  out  these  parties, 
he  had,  in  man}^  cases,  taken  their  notes,  got  them  discounted  at  the  bank, 
and  so  made  his  returns  to  the  Court,  holding  the  judgment  as  his  own 
security.  On  taking  charge  of  the  branch,  T  found  the  sheriff's  account 
to  be  as  large  as  a  wholesale  merchant's  who  had  discounted  the  notes 
of  his  customers.  ^Vhat  the  sheriff'  was  doing  with  all  these  discounts,  I 
could  not,  at  first,  imagine,  for  I  had  never  seen  anything  of  the  kind  be- 
fore, nor  have  I  indeed  since.  However,  I  insisted  upon  a  liquidation  of 
the  account.  Fortunately,  the  times  had  begun  to  improve;  farmers  once 
more  had  good  crops  and  were  able  to  pay  their  indebtedness  and  release 
the  judgments  hanging  over  them.  The  slieriff's  discounts  were  there- 
fore all  closed  out  without  loss. 

An  Insolvent  Tradeh. 

Far  different,  however,  was  our  experience  in  another  case. 

A  few  miles  from  the  town  a  manufacturing  firm  was  carrying  on 
an  extensive  business.  The  members  of  the  firm  were  of  the  class  de- 
scribed in  the  last  chapter.  But  instead  of  half-gentleman  and  half- 
man-of -business,  they  could  better  be  described  as  three-parts-gentle- 
man and  one-part  man-of-bu.siness.  The  principal  partner  was  of  such 
aristocratic  manners  that  he  was  often  spoken  of  in  the  town  as  the 
Duke.  He  had,  however,  some  little  knowledge  of  business.  The  other 
partner  was  a  younger  man,  a  member  of  a  good  count}^  family  in  Eng- 
land, who  had  come  out  to  Canada,  as  many  others  had  in  that  neighbor- 
hood, largely  to  spend  his  time  in  fishing  and  shooting.  He  had  no 
knowledge  of  business  whatever. 

The  firm  kept  their  account  in  the  branch,  and  had  large  advances. 
They  had  also  some  trade  bills,  drawn  against  consignments;  their 
method  of  business  being  to  ship  off  on  consignment  nearly  evervthing 
they  mamifactured,  drawing  against  it.  as  much  as  they  were  allowed  to 
do,  and  trust  to  Providence,  that  account  sales  would  straighten  matters 
out.  Meantime,  they  had  a  good-natured  banker  to  deal  with,  who  never 
enquired  particularly  what  advances  were  wanted  for,  or  what  they 
rested  on.    Accordingly,  they  made  up  deficiencies  by  continually  obtain- 

22 


838  BANKING    AND    COMMERCE. 

iiig  further  advances.  But  account  sales  seldom  showed  any  balance 
due;  in  fact,  they  were  not  seldom  accompanied  by  a  redrawing  for 
reclamation.  The  effect  of  this  style  of  business  may  be  imagined.  It 
was  carried  on  year  after  year  at  a  loss,  the  loss  showing  itself  in  a  con- 
stantly increasing  advance  account  at  the  branch. 

It  must  not  be  supposed  that  tlie  head  office  did  not  notice  what  was 
going  on.  Head  office  did,  and  v;rote  repeated  letters  of  remonstrance. 
But  the  manager  was  one  of  the  most  plausible  men  that  ever  lived,  and 
succeeded  more  than  once  in  quieting  the  apprehensions  of  headquarters 
and  persuading  them  to  allow  him  to  go  on  advancing. 

But  a  crisis  came  at  last.  The  advances  at  this  branch  as  a  whole  at 
length  became  serious  enough  to  be  a  drain  upon  the  resources  of  the 
bank  in  such  times  as  were  raging  over  the  country'.  A  stop  had  to  be 
put  to  them.  I  was  sent  down  to  make  a  thorough  overhauling  of  the 
business,  and  the  manager  sent  in  his  resignation. 

On  examining  the  affairs  of  this  firm,  I  became  convinced  they  were 
insolvent.  But  they  strenuously  denied  it.  alleging  that  proper  valua- 
tions would  show  that  they  could  pay  their  debts,  at  any  rate.  The  late 
manager  thought  so  too.  On  this  assumption  the  firm  submitted  an  elab- 
orate scheme  for  the  continuance  of  advances,  their  business  to  be  under 
a  sort  of  supervision  of  the  bank  meanwhile. 

I  forwarded  this  to  head  office,  but  stated  that  I  could  not  recommend 
it.  My  comment  on  their  proposal  was  that  I  could  see  no  end  to  it — 
Jio  prospect  of  ever  paying  off  advances  by  that  process,  or  even  of  re- 
ducing them.  There  was  certainly  a  very  heavy  loss  before  us  if  they 
stopped.  But  I  was  convinced  that  to  let  them  go  on  would  make  matters 
worse.  It  was  not  the  sort  of  accoimt  to  be  "nursed."  The  foundation 
of  any  rational  nursing  process  is  confidence  in  the  business  ability  of 
the  men;  and  of  this  I  had  none.  They  stopped  therefore.  We  were 
practically  their  only  creditors,  and  made  the  best  of  their  assets.  But 
the  result  was  a  loss  sufficiently  large  to  wipe  out  not  only  all  the  profits 
we  had  made  out  of  their  account,  but  a  large  part  of  the  profits  made 
out  of  all  the  rest  of  the  business  from  the  opening  of  the  branch,  a 
never-to-be-forgotten  lesson  of  the  consequences  of  a  good-natured  and 
so-called  enterprising  style  of  conducting  bank  business. 

Amongst  other  advances  at  the  branch  I  found  some  of  considerable 
amount,  that  liad  been  made  on  account  of  a  local  railway."     Tliese  were 


7  In  connection  with  this  railway  a  remarkable  circumstance  suhseciuently 
transpired.  After  I  left  the  branch  for  Toronto,  a  cargro  of  rails  for  this'  road 
wa.s  landed  on  the  steamboat  wharf.  But  the  railwoy  had  no  money  to  pay  for 
them,  and  there  was  no  good-natured  manager  there  then  to  advance  them 
money.  The  rails,  therefore,  lay  on  the  wharf  year  after  year,  with  charges  ac- 
cumulating. But  when  I  assumed  charge  of  the  ^Merchants"  Bank  in  Montreal.  I 
came  across  these  very  rails  again.  They  were  held  as  .security  by  the  bank 
under  a  letter  of  credit  granted  to  a  customer  who  had  failed.  The  bank  had 
taken  pos.session.  The  local  railway  company  by  that  time  h-ad  entirely  collapsed, 
and  there  was  no  resource  but  to  sell  them  through  a  broker  to  the  highest 
bidder;   of  cour.se,   at  a  considerable  loss. 


MY   EXPERIENCES  AS  A  BRANCH   MANAGER.  .'539 

nil  ill  the  sliape  of  notes  bearinj;  the  names  of  various  people  in  the 
town.  But  as  we  had  the  same  names  in  their  own  accounts,  or  in  the 
accounts  of  other  persons;  sometimes  as  promisors,  sometimes  as  en- 
dorsers, it  was  a  matter  of  infinite  difficulty  to  disentangle  these 
railway  advances  from  those  made  to  customers  for  their  own  business. 
However,  the  task  was  accomplished  at  last,  and  a  certain  number  of 
persons  agreed  to  raise  the  money  to  liquidate  the  account;  which  for- 
tunately they  were  able  to  do.  And  this  I  must  say,  that  they  were  all 
"honorable  men,"  not  in  Mark  Antony's  sense,  but  in  reality. 

Vamte  of  Second  Mortgages. 

While  at  this  branch,  I  had  some  experiences  which  stood  me  in  good 
stead  in  after  years.  Let  me  relate  some  of  them.  One  of  these  was  an 
object  lesson  as  to  Second  Mortgages.  A  customer  was  carrying  on  a 
saw-milling  business.  The  account  had  worked  unsatisfactorily,  and  we 
had  obtained  a  second  mortgage  on  his  property.  I  was  assured  that 
there  was  a  substantial  value  in  it  after  providing  for  the  first.  The 
advances  were  carried  on  for  a  time  with  some  expectation  that  our 
security  would  eventually  bring  us  out.  But  the  account  continued  un- 
satisfactory; moreover,  I  had  made  up  my  mind  that  our  customer  was 
not  honest.  To  realize  our  security  it  was  necessary  to  pay  off  the  first 
mortgage.     This  we  did,  adding  thus  to  our  advances. 

But  when  we  brought  the  property  to  sale,  we  could  scarcely  get  a 
bid  at  any  price.  It  was  withdrawn.  Put  up  again,  the  highest  bid 
we  got  was  less  than  the  sum  we  had  paid  to  free  the  property.  By  this 
time  I  had  become  sick  of  the  whole  business  of  winding  up  the  man's 
estate,  and  concluded  to  let  the  saw-mill  go. 

It  turned  out  that  we  would  have  been  better  off  if  we  bad  taken  no 
security  at  all. 

A   Judgment-Pkoof   Endorser. 

Another  lesson.  The  man  above  named,  I  have  said,  was  dishonest. 
He  committed  some  flagrant  act  of  fraud  for  which  we  determined  to 
prosecute  him.  The  case  was  as  clear  as  daylight.  His  counsel,  a  very 
clever  local  lawyer,  knowing  he  had  no  chance  if  he  dwelt  on  the  merits 
of  the  case,  spent  his  strength  in  appealing  to  the  jury  to  protect  an  un- 
fortunate neighbor  against  the  rapacity  and  tyranny  of  this  big  moneyed 
corporation.  When  I  heard  all  this,  I  felt  sure  how  it  would  go.  And 
go  it  did  against  us.  The  jury  found  the  man  not  guilty,  and  we  liad  the 
pleasure  of  paying  heavy  costs. 

One  of  this  man's  endorsers  was  a  wealthy  farmer  in  an  adjoining 
county.  He  was  represented  to  be  abundantly  good  for  the  amount  he 
endorsed;  so  I  renewed  the  paper  several  times,  giving  attention  to  get- 
ting the  weaker  notes  in  the  account  paid.  At  length,  however,  I 
determined  to  bring  this  endorser  "to  book."  Getting  no  answer  to  my 
letters,   I  one  day  went  over   to  his    farm,  a  considerable  distance  off; 


340  BANKING    AND    COMMERCE. 

found  him,  a  man  well  on  in  years,  sitting  comfortably  in  the  living 
room  of  the  farm-house,  which  was  a  very  good  one.  The  farm  was  one 
of  the  sort  that  abounds  in  that  part  of  Ontario,  clean,  clear,  well  fenced, 
well  culti\ated,  worth  a  good  deal  of  money.  He  received  me  very 
coolly,  and  in  answer  to  m}'  query  wlien  lie  was  going  to  take  u})  the  note, 
answered  that  he  was  not  going  to  take  it  up  at  all.  On  my  referring  to 
this  fine  farm  of  his, — he  said  it  was  not  his  at  all.  He  had  made  it 
over  to  his  sons  some  time  ago,  together  with  all  there  was  upon  it,  in 
consideration  of  a  maintenance  for  life. 

This  was  a  revelation,  indeed.  And  on  our  solicitor  making  enquiry 
at  the  Registry  office  of  the  county,  he  found  it  was  true.  ^Moreover,  on 
my  asking  whether  such  a  conveyance  could  not  be  set  aside,  considering 
bis  endorsement;  he  gave  the  opinion  that  it  could  not,  the  consideration 
being  sufficient.  Our  security,  therefore,  turned  out  to  be  worth  nothing. 
This  case  made  a  deep  impression  on  me  in  relation  to  the  value  to  be 
attached  to  endorsements  in  plain  figures. 

By  the  time  that  two  years  had  elapsed,  I  had  got  the  business  into 
a  fairly  satisfactory  shape.  T  had  been  sent  to  get  payment  of  a  num- 
ber of  the  discount  accounts  and  had  done  it;  making  myself  during 
the  process  very  impopular  with  a  large  section  of  the  community.  I  had 
tried  to  be  reasonably  courteous  during  the  Avhole  of  this  proceeding, 
considering  the  work  to  be  done,  but  at  times  my  patience  was  rather 
tried.  On  one  occasion  a  money-lender  whom  we  dealt  with,  on  my  re- 
fusing to  renew  some  paper  for  him,  told  me  that  we  might  collect  it  at 
our  leisure!  "Very  good,"  said  I;  "my  leisure  is  twenty-four  hours.  If 
you  do  not  pay  by  this  time  to-morrow,  you  will  have  to  look  out."  He 
did  pay  up.  for  he  knew  very  well  he  could  not  afford  to  be  sued. 

Appointed  Cashier  of  the  Bank  of  Toronio. 

After  clearing  out  the  rubbish,  there  was  a  considerable  residuum  of 
satisfactory  business  at  the  branch;  and  I  settled  down  to  make  the  best 
of  it,  quite  expecting  to  spend  the  rest  of  my  days  there.  For  of  pro- 
motion at  that  time  there  appeared  little  chance.  The  cashier  was  a 
younger  man  than  myself,  with  apparently  a  long  life  before  him.  The 
manager  of  the  Montreal  Branch,  (for  we  had  by  this  time  opened  in 
Montreal,  and  his  position  was  a  superior  one  to  mine)  was  also  a  younger 
man.  To  be  transferred  to  any  other  branch  than  Montreal  would  be  no 
promotion  at  all.  The  way,  therefore,  seemed  blocked.  However,  we 
were  reasonably  comfortable  at  liomc;  and  I  remember  once  making  a 
calculation,  that  in  the  quiet  way  in  whicli  we  were  living  I  could  save 
enough  in  tnenty  years,  at  any  rate,  to  "keep  the  wolf  from  the  door" 
for  the  remainder  of  my  life. 

But  how  little  can  we  see  the  jirogress  of  events !  ^^'ithin  three 
months  of  my  making  this  calculation  a  circumstance  transpired  which 
influenced  my  whole  future.  Our  much  esteemed  President  died  sud- 
denly;   resjjccted   by  all   who   had   ever   known   him.      It  was   then  con- 


MY   EXPERIENCES  AS  A  BRANCH   MANAGER.  3U 

eluded  to  advance  the  cashier  to  the  office  of  president;  and  one  day, 
(it  was  the  day  before  Christmas,  18()-!-,)  I  learned  to  my  astonishment 
that  I  was  appointed  cashier.  The  new  president  desired  me  to  come 
up  to  Toronto  and  confer  with  him  about  business.  I  went  up.  He  in- 
formed me  that  he  wished  me  to  assume  the  position  at  once.  I  there- 
fore handed  over  the  business  of  the  branch  to  my  successor,  who  came 
down  for  the  purpose.  And  on  leaving,  in  spite  of  the  apparent  unpopu- 
larity I  had  incurred,  a  handsome  presentation  of  ])late  was  made  to  me 
by  the  customers,  which  is  on  my  sideboard  at  this  day. 

Thus  ended  my  experience  as  a  Branch  Manager,  in  the  course  of 
which  I  learned  lessons  that  were  invaluable  to  me  afterwards;  mostly 
lessons  of  what  not  to  do;  which  I  could  not  have  learned  in  any  way 
except  by  fulfilling  the  task  of  steering  the  little  vessel  amongst  such 
iocks  and  quicksands  as  I  met  with  in  this  part  of  my  banking  career. 


CHAPTER  IF. 

EXPERIENCES      IN      HEAD      OFFICE      MANAGEMENT      IN 
TORONTO. 

Assumption  of  New  Duties — Civil  War  in  the  United  States — 
Premium  on  Gold — Troubles  of  the  Bank  of  Upper  Canada — 
Stoppage  of  the  Commercial  Bank — Organization  of  New 
Banks  —  An  Unfortunate  Speculation  —  Retirement  from 
Banking. 


M 


y  a2)poiiitment  to  the  office  of  Cashier  of  the  Bank  of  Toronto, 
opened  out  apparently  a  far  wider  sphere  of  action  than  ever  I 
siip2)osed  would  fall  to  my  lot.  For  I  was  now  removed  from  a 
branch  in  a  small  town^  with  its  small  circle  of  interests  and  activities, 
to  the  Head  Office  of  a  Bank  in  a  large  and  important  city,  which  had 
by  this  time  begun  to  recover  from  the  depression  spoken  of  in  a  former 
chapter.  Crops  were  abundant  once  more ;  that  was  the  root  of  the  whole 
business,  as  it  largely  is  to-da3^  Storekeepers  could  buy  freely  from 
wholesale  houses;  and  these,  in  their  turn,  could  do  business  with  a  rea- 
f^onable  prospect  of  getting  their  accounts  paid.  And  the  bank  itself 
by  this  time  had  passed  safely  through  a  process  of  purgation  somewhat 
similar,  though  less  severe,  than  that  described  in  the  last  chapter.  Its 
business,  on  the  whole,  was  in  a  satisfactory  position,  and  it  Avas  making 
steady  progress.  P'or  myself,  it  was  an  immense  satisfaction  to  get  back 
to  a  sphere  in  which  the  higher  descriptions  of  banking  were  carried  on, 
namely,  the  accounts  of  wholesale  importers,  large  dealers  in  grain, 
lumber  and  timber,  together  with  those  of  millers,  distillers,  and  ex- 
porters generally.  The  Branch  in  Montreal  was  doing  a  large  and 
flourishing  business,  and  as  all  the  branches  M'ere  supervised  and  governed 
from  Toronto,  I  had  the  opportunity  of  becoming  practically  acquainted 
with  a  much  wider  sphere  of  operations  than  I  had  known  before. 

It  was  some  years,  however,  before  I  had  the  responsibility  of  active 
management  and  control.  The  president,  though  he  had  acquired  a 
higher  title,  was  still'  performing  the  same  duties,  the  consequence  being 
that  my  real  position  was  rather  that  of  assistant  than  of  actual  cashier.'' 

The  change  was  not  agreeable  at  first,  for  I  had  had  real  manage- 
ment and  control  when  manager  of  the  branch.  However,  all  came  round 
in  time;  as  the  proverb  says,  "all  things  come  to  those  that  wait." 


8  The  Canadian  cashier  of  those  days  was  the  GENERAL  MANAGER  of  these: 
the    only    difference    probably   being    that   when    the    chief    executive    officer    was 
called   cashier,    the   president  was   expected  to  give  more  attention  to  the  business 
of  the   liank   than  he  commonly  does  now. 
?,42 


HEAD   OFFICE   MANAGEMENT    IN   TORONTO.  3^3 

Effects  of  the  War  ix  the  Uxited  States — Pkemium  ox  Gold. 

My  narrative  must  now  go  back  a  little. 

\^ilile  branch  manager  I  had  once  been  unexpectedly  summoned  to 
take  the  cashier's  duties  whilst  he  went  over  to  Scotland  for  a  holiday. 

A  few  months  before  this,  the  war  between  the  North  and  South  had 
broken  out,  and  Gold  had  shown  signs  of  going  to  a  premium.  This  was 
a  serious  matter  for  us;  as  we,  like  other  Canadian  bankers,  could  not 
avoid  keeping  considerable  balances  of  money  in  New  York,  which,  of 
course,  formed  part  of  our  reserve  cash.  The  premium  on  gold,  there- 
fore, whatever  it  was,  would  mean  a  loss  of  that  amount,  in  case  we 
needed  the  money.  The  cashier,  however,  on  going  away  was  not  much 
disturbed  about  this.  Like  most  other  persons  in  Canada  and  the  North, 
lie  supposed  that  the  war  would  soon  be  over,  and  American  currency 
revert  to  its  natural  position.  Gold  might  go  to  four  or  five  per  cent, 
premium ;  but  that,  he  thought,  would  be  the  limit  of  it.  And  it  could  not 
last  long. 

Amongst  the  directions  he  gave  me  for  management  in  his  absence, 
one  was  that  I  must  not  disturb  myself  about  this  premium  on  gold,  but 
let  the  balance  in  New  York  go  on  accumulating,  even  if  the  premium 
rose  to  ten  per  cent.'-'     It  was  under  these  circumstances  I  took  charge. 


9  In  view  of  the  direction  given  me  by  the  cashier  not  to  be  disturbed  even 
if  gold  rose  to  110,  it  is  interesting  to  note  what   really   was   its    course. 

In  my  banking  diary,  I  kept  a  note  of  it,  inasmuch  as  all  the  transactions 
of  our  lumber  customers,  and  of  a  large  part  of  our  grain  customers,  involved 
the  turning  of  American  currency  into  gold.  The  price,  therefore,  was  a  matter 
of  daily  interest;  and  so  were  the  events  that  influenced  It.  A  gold  exchange 
was  opened  in  New  York;  operations  in  it  soon  became  heavy,  and  not  only  op- 
erations but  speculations,  as  we  had  good  reason  afterwards  to  know,  for  one  of 
our  officers  became  entangled  in  them.  Every  operation  of  the  war  was  watched 
with  the  keenest  interest  in  Wall  Street  and  speculated  upon.  When  the  North 
suffered  a  reverse,  gold  went  up;  if  things  were  going  against  the  South,  gold 
went  down;  and  so  on,  and  so  on,  all  through  till  the  end.  An  attempt  was  made 
by  Congress  in  1S64  to  stop  this  speculation,  and  an  act  was  passed  making  it 
ILLEGAL,  to  deal  in  gold.  This  was  on  the  22d  of  June.  The  only  effect  of 
this  was  to  send  gold  up  with  a  bound.  Within  ten  days  it  advanced  FIFTY 
PER   CENT. 

Here  are  a  few  of  the  figures  showing  the  price  of  gold  after  we  decided  U 
realize  half  our  currency  balance.  This  was  in  July,  1S62,  and  gold  was  then  at 
116.  In  October  it  was  137,  in  March  172.  After  this  there  were  heavy  fluctua- 
tions until  the  battle  of  Gettysburg,  and  the  taking  of  Vicksburg  by  General 
Grant  on  the  same  day,  the  fourth  of  July,  1863.  This  sent  the  price  down  to 
126.  But  it  rose  again,  until  in  October  it  was  158,  at  about  which  figure  it  con- 
tinued with  fluctuations,  until  the  April  following.  It  was  then  170.  In  May, 
1864,  it  rose  to  193.  in  June  to  200.  Then,  the  act  making  it  illegal  to  deal  in 
gold  at  all  was  passed.  Within  ten  days  afterwards,  it  was  280,  and  on  the  11th 
of  July  it  touched  the  highest  point  during  the  war,  namely  283.  After  that 
there  were  heavy  fluctuations.  In  September  it  was  down  to  190,  in  November  up 
to  257.  But  all  this  time  General  Grant  was  making  his  way  through  those  ter- 
rible battles  of  the  Wilderness,  in  spite  of  the  stubborn  resistance  of  General 
Lee,  until  it  became  apparent  that  he  w^ould  soon  be  able  to  plant  his  forces  to 
the  south  of  Richmond.  So  in  the  month  of  January,  1865,  gold  dropped  to  198, 
and  in  March  to  14S.  Richmond  was  taken  on  the  3d  of  April— when  the  price 
was  146.     General  Lee  surrendered  on  the  8th,  but  this  event  had  evidently  been 


344  BANKING    AND    COMMERCE. 

The  premium  crept  up  quietly  and  steadily  week  by  week.  On  the  31st 
of  May  gold  was  quoted  at  104.  On  the  5jOth  of  June  it  was  109V2-  By 
the  31st  of  July  it  was  11 6.  The  president  Avas  with  me  all  this  time, 
and  we  conferred  a  good  deal  about  the  matter.  He,  however,  was  of 
the  same  opinion  as  the  cashier;  and  thought  we  need  not  trouble  our- 
selves much  about  it.  I  was,  however,  seriously  troubled  myself,  for  as 
time  went  on,  it  became  necessary,  as  a  matter  of  finance,  that  we  should 
avail  ourselves  somewliat  of  our  balance  in  New  York.  But,  to  do  this, 
we  must  turn  currency  into  gold,  at  a  heavy  loss.  The  price  of  gold 
moreover  was  rising  every  week,  and  I  could  see  no  reason  why  it  should 
not  go  on  rising  indefinitely  as  long  as  the  war  lasted. 

I  therefore  obtained  jiermission  from  the  Board  to  go  down  to  New 
York  and  investigate  the  matter  on  the  spot.  The  problem  was.  wliether 
there  was  any  natural  limit  to  this  rise  in  gold,  and  consequent  deprecia- 
tion of  our  American  funds.  If  the  war  went  on,  was  not  gold  likely  to 
continue  to  rise,  and  our  balance  in  New  York  to  be  worth  less  and  less? 
I  concluded  to  consult  two  persons  on  the  subject.  One  was  naturally 
the  able  and  experienced  cashier  of  the  bank  where  we  kept  our  account, 
Mr.  H.  F.  Vail,  of  the  Bank  of  Commerce;  the  other  was  Mr.  Charles 
F.  Smithers,  who  had  then  left  the  Bank  of  IVIontreal  and  was  in  busi- 
ness for  himself  as  a  private  banker.  I  well  remember  Mr.  Vail's 
answer.  He  said,  "You  want  to  know  my  idea  as  to  the  course  of  gold; 
and  whether  the  premium  is  likely  to  increase,  and  what  it  may  increase 
to  if  the  war  goes  on?  I  might  answer,  'Go  and  consult  our  janitor; 
he  can  give  you  as  good  an  opinion  as  I  can.'  But  the  fact  is,  speaking 
seriously,  I  am  as  much  in  the  dark  as  you  are.  As  for  us  New  York 
bankers,  you  know  we  are  going  to  stand  by  the  Government;  we  have 
subscribed  amongst  us  fifty  millions  to  help  to  carry  on  the  Avar;  and 
vcrv  sure  I  am  that  Ave  Avill  stand  bv  the  Government  till  the  end.     All 


discounted,  for  gold  only  fell  to  145.  A  week  after  this,  President  Lincoln  -was 
assassinated,  which  sent  gold  up  to  158.  This  was  the  highest  point,  with  a  mo- 
mentary exception,  that'  gold  touched  after  the  war  was  over.  But  many  long 
years  were  to  elapse  before  it  touched  par,  and  a  quotation  or  two  of  its  subse- 
quent  course   may  be   interesting. 

In  1866  it  rose  again  to  155.  In  1868  it  ranged  from  135  to  140.  In  September, 
1869,  the  terrible  "Black  Friday"  occurred,  when,  in  one  day.  the  transactions  in 
gold  amounted  to  FOUR  HUNDRED  MILLIONS:  THE  PRICE  OPENING  AT 
150.  RISING  AT  NOON  TO  165,  when  the  Government  telegraphed  to  .<=ell  FOITR 
MILLIONS,  and  the  price  dropped  to  1.35  in  five  minutes.  After  this,  year  after 
year,  the  price  seldom  varied  more  than  seven  per  cent.,  dropping  to  108^^  in 
December,  1871,  and  rising  to  115*4  in  September,  1872.  And  thus  it  went  on, 
rising  and  falling,  month  by  month,  and  year  by  year,  until  the  end;  heavy 
speculations  going  on  all  the  time  as  the  course  of  political  or  national  events 
were  adverse  or  otherwise.  Thus  even  as  late  as  1875  the  price  went  up  to  117'^. 
This,  however,  was  the  last  spasm  in  the  long  and  exciting  course  of  a  depreci- 
ated currency.  In  the  Spring  of  1877,  gold  had  fallen  to  106.  and  thence  it  stead- 
ily bore  down   until  specie  payments  were   once  more  resumed. 

Thus  ended  one  of  the  most  extraordinary  episodes  in  modern  finance,  dur- 
ing the  whole  of  which  Canada  remained  firm  on  a  gold  basis.  How  these  fluc- 
tuations affected  the  bank  into  whose  service  I  subsequently  entered  is  told  in 
the    next   chapter. 


HEAD   OFFICE   MANAGEMENT    IN   TORONTO.  3^15 

that  is  perfectly  clear;  but  what  the  course  of  gold  will  be,  no  mortal 
men  can  tell."  While  I  was  speaking  with  Mr.  Vail,  General  Anderson, 
who  had  so  well  defended  Fort  Sumter,  came  in,  and  Mr.  Vail  introduced 
me  to  him.  I  appreciated  this,  for  I  had  sympathized  with  the  North 
from  the  beginning.  I  next  went  over  to  Mr.  Smithers.  I  could  talk 
freely  with  him,  as  he  was  a  Canadian,  and  could  look  at  the  matter  from 
our  point  of  view.  My  principal  question  to  him  was  not  so  much  what 
he  thought  gold  might  rise  to,  but  whether  there  was  any  limit  to  the 
rise  at  all?  We  both  knew  very  well,  there  was  such  a  limit  in  the  case 
of  sterling  exchange ;  that  is,  when  dealt  with  on  a  gold  basis.     Was  there 


any  such  limit  in  the  case  of  gold? 


He  said  he  could  see  no  such  limit. 


I  returned  to  Toronto,  communicated  what  I  had  Iieard  in  New  York, 
and  strongly  recommended  that  we  should  convert  a  considerable  part 
of  our  balance  into  gold,  for  fear  of  worse  happening.  It  would  cost  us 
a  good  deal  of  money,  but  there  was  no  sign  of  the  war  abating,  but 
every  prospect  of  its  going  on  for  some  time;  and  if  the  war  went  on, 
it  was  certain  that  gold  would  continue  to  rise.  I  think  one  or  two 
members  of  the  board  considered  me  rather  presumptuous  in  giving  them 
advice  on  the  subject,  for  I  was  only  a  branch  manager,  of  second  rank, 
in  temporary  charge  there.  The  president,  I  think,  agreed  with  me,  and 
after  a  thorough  discussion  it  was  determined  to  convert  one-half  of  our 
currency  balance  into  gold,  and  leave  the  rest  to  the  course  of  events.  It 
cost  us  a  large  amount  of  money,  but  at  any  rate,  we  had  got  a  consider- 
able sum  safe  "out  of  the  fire"  and  available,  if  we  wanted  it.  We  placed 
the  gold  to  the  credit  of  our  Gold  Account;  for  gold  accounts  had  then 
become  common  between  Canadian  banks  and  New  York,  and  our  deal- 
ings thereafter  with  the  Bank  of  Commerce  were  in  this  gold  account. 
The  currency  balance  remaining,  we  held  on  to,  until  the  resumption  of 
specie  payments  brought  matters  round  many  long  years  afterward. 
But  to  resume: 

My  position  at  head  office  being  a  subordinate  one,  I  continued  dis- 
charging this  kind  of  duty  for  several  years.  The  Bank  of  Toronto 
was  prospering,  and  no  events  worth  recording  transpired  until  the  long 
sickness  and  death  of  the  cashier  placed  upon  me  a  much  larger  share 
of  actual  management  than  before. 

His  deatli  indeed  was  a  serious  loss.  He  occupied  by  his  marriage  a 
very  high  social  position;  he  was  a  thoroughly  trained  banker,  energetic 
in  character,  rather  sanguine  in  temperament;  more  ready  to  undertake 
risks  than  I  ever  was,  but  with  a  most  remarkable  faculty  of  making  the 
best  of  doubtful  and  difficult  accounts.  I  remember  saying  to  the  presi- 
dent afterwards,  that  I  could  not  pretend  to  such  ability  as  the  late 
cashier  had  of  getting  out  of  trouble;  all  I  could  lay  claim  to,  possibly, 
was  the  faculty  of  not  getting  into  it.  When  he  had  passed  away,  I  felt 
like  a  son  who  had  lost  a  father;  for  though  he  was  younger  than  I  in 
years,  I  always  looked  upon  him  as  far  beyond  me  in  banking  ability. 


346  BANKING    AND    COMMERCE. 

To  succeed  him  as  president,  the  board  elected  the  senior  partner  of 
one  of  the  -wealthiest  firms  in  the  country,  a  gentleman  of  years  and  large 
business  experience,  with  a  remarkably  solid  j  udgment  of  men  and  things. 
The  presidency  has  continued  in  his  family  with  advantage  ever  since. 
He  had  long  been  a  director  of  the  Bank  of  Upper  Canada, 
and  used  to  tell  curious  stories  of  the  way  things  were  managed  there.^" 
(T  one  day  said  to  the  president,  from  what  I  knew  otherwise,  as 
well  as  what  he  told  me,  that  a  safe  rule  for  us  to  follow  in  guiding  the 
Bank  of  Toronto  would  be  to  find  out  what  the  Bank  of  Upper  Canada 
would  do,  and  then  to  do  exactly  the  opposite.)  The  vice-president  was 
the  business  partner  of  the  president,  and  like  him,  though  much  younger 
in  years,  was  a  man  of  singular  ability,  information  and  experience,  thor- 
oughly in  touch  with  the  business  affairs  of  the  time,  especially  with  all 
tlie  branches  of  the  grain  and  milling  trades.  These  two  gentlemen  kept 
close  touch  with  the  affairs  of  the  bank,  and  along  with  another  director, 
a  veri'  wealthy  capitalist,  who  used  to  drop  in  nearly  every  day,  one  of 
the  shrewdest  men  I  ever  knew,  formed  what  might  be  called  an  "inner 
circle"  of  the  board. 

With  these  gentlemen  about  me  day  by  day.  I  spent  the  remaining 
twelve  years  of  my  life  as  Cashier  of  the  Bank  of  Toronto,  in  actual 
management. 

Troubles  of  the  Bank  of  Upper  Canada. 

During  these  years  several  very  notable  events  happened,  by  far  the 
most  important  of  which  was  the  long-continued  contest  to  preserve  bank 
circulation.  This  matter,  however,  passed  through  so  many  phases  that 
I  have  thought  it  needful  to  devote  the  whole  of  the  next  chapter  to  it. 
Of  other  important  events,  the  first  was  the  failure  of  the  Bank  of 
Upper  Canada.  Of  this  bank  I  have  already  spoken.  It  had  at  one. 
time,  a  very  high  reputation,  and  its  credit  was  quite  equal  to  that  of  the 
Bank  of  Montreal.  For  many  years  the  account  of  the  Government  was 
kept  with  it.  During  several  prosperous  years  preceding  the  Crimean 
War,  it  had  made  very  large  profits.  But  banking  was  little  understood 
in  Upper  Canada  at  that  time,  and  it  made  the  egregious  mistake  of 
dividing  nearly  the  whole  of  its  surplus  amongst  its  stockholders.  And 
for  years  there  had  been  accumulating  in  its  books  masses  of  loans, 
which  rested  on  nothing  but  real  estate,  much  of  it  of  wretchedly  poor 
qualitv.  This  gave  rise  to  a  perpetual  series  of  renewals.  Its  internal 
discipline  was  bad,  and  its  government  of  branches  notoriously  weak.     A 


10  One  of  these  Is  worth  recording:.  The  board  of  directors  of  that  institu- 
tion was  largely  composed  of  professional  men  who  knew  nothing  practically  about 
business.  One  of  the  number  had  been  an  admiral  in  the  British  navy.  A  mat- 
ter of  weight  and  Importance  coming  before  the  board  on  one  occasion,  this 
good  gentleman,  after  It  had  been  discussed  for  a  time,  bun-st  out  as  follows: 
"WKI.T..  GENTLEMEN.  I  KNOW  HOW  TO  SAIL  A  SHIP.  BUT  I'LL  BE 
TTANGED   IF   I    KNOW    ANYTHING    ABOUT   SUCH   MATTERS   AS    THESE!" 


HEAD   OFFICE   MANAGEMENT    IX   TORONTO.  31? 

short  time  after  I  assumed  charge  in  'I'oroiito,  on  its  sending  an  inspector 
to  a  certain  branch,  tlie  manager  set  him  at  defiance,  refusing  to  receive 
him,  and  locked  the  door  of  the  safe  against  liim.  After  tlie  revulsion 
of  ISJT  the  Government  account  was  removed.  This  seriously  aft"ected 
the  prestige  of  the  bank,  and  injured  its  credit.  It  was  known  to  be 
heavily  in  debt  to  its  agents  in  London;  and  they,  at  length  insisted  on  a 
change  of  management.  But  the  bank  was  too  far  gone  to  be  restored 
to  soundness  by  any  change  whatever ;  so  after  a  few  years  of  struggle,  it 
closed  its  doors.  The  bankers  of  the  country  were  not  suri)rised  at  this: 
in  fact,  they  had  been  preparing  for  it  for  months  back.  But  it  created 
a  good  deal  of  excitement  amongst  the  people  of  Toronto,  and  the  farm- 
ers over  a  wide  district  of  Upper  Canada.  Nearly  everybody  that  had 
notes  at  nil  had  some  of  this  bank  in  their  possession.  There  was  no 
fcecuritv  for  bank  notes  at  that  time,  and  a  wave  of  distrust  passed  over 
the  community  respecting  the  notes  of  all  the  banks  in  Upper  Canada. 
Of  these  the  Bank  of  Toronto  had  become  one  of  the  most  prominent, 
and  quite  a  heavy  run  by  holders  of  small  notes  took  place. 

Our  counter  was  thronged  all  day  long,  for  several  days,  by  people 
presenting  notes  for  redemption;  mostly  small  notes.  We  met  this  in  the 
usual  way  by  piling  up  gold  on  the  counter,  and  detailing  a  special  teller 
to  attend  to  the  applicants.  Many  of  these,  when  they  saw  the  piles  of 
gold,  went  away  satisfied:  others  presented  their  notes,  and  got  quickly 
paid.  The  disturbance  abated  in  a  day  or  two;  no  deposits  were  with- 
drawn, and  the  whole  amount  of  gold  we  paid  out,  was  far  less  than 
many  of  our  customers  could  have  drawn  out  by  a  single  check.  The 
whole  affair,  indeed,  with  all  its  bustle  and  apparent  excitement,  was  a 
mere  "tempest  in  a  teapot." 

The  affairs  of  the  defunct  bank  ]>roved  to  be  in  very  bad  shape.  The 
v/hole  capital  was  lost,  and  in  addition  a  good  deal  of  loss  was  suffered 
by  depositors  and  noteholders.  A  certain  jiortion  of  the  last  fell  upon  the 
banks,  and  became  the  ground  work  of  an  agitation  for  the  securing  of  the 
currency,  the   consequences   of  which   survive   to   this   day.^^ 

Stoppaof  of  the  Commehciai.  Baxk. 

The  next  affair  to  which  I  will  revert  was  the  stoppage  of  the  Com- 
mercial Bank  of  Canada.  This  institution  was  in  far  better  shape  than 
the  foregoing;   for   on   Ix^ng  wound    up   it   pnu\   its   noteholders   and   de- 


ll Let  me  relieve  the  reader's  attention  to  these  monetary  details  by  an- 
other story  of  the  humors  of  the  time,  which  was  told  me  by  our  g-ood  president 
(i.  e.,  of  the  Bank  of  Toronto),  speaking  from    personal    knowledge. 

The  cashier  of  the  Bank  of  Upper  Canada,  before  the  change  of  manage- 
ment, had  been  in  office  from  its  very  foundation,  and  was  well  known  all  over 
the  country.  He  lived  in  great  style,  in  a  magnificent  house,  and  drove  to  busi- 
ness in  a  carriage  and  pair.  But  he  was  heavily  in  debt  to  the  bank.  He  was 
very  crusty  to  outsiders;  but  "Hail  fellow,  well-met"  to  his  familiars.  One  of 
these,  a  well-known  doctor  in  the  city,  said  to  him  one  day  when  his  equipage 
was  at  the  bank  door,  "T0:M.— WHY  DON'T  YOU  SELL.  YOUR  CARRIAGE 
AND  HORSES,   AND   P.\Y  YOUR  DEBTS?  " 


318  BANKING    AND    COMMERCE. 

positors  in  full,  and  returned  one-third  of  the  caiiital  to  its  stockholders. 
But  it  had  unfortuiiately  got  itself  entangled  in  heavy  advances  to  the 
Detroit  and  Milwaukee  Railway  Company,  and  after  a  verdict  had  been 
given  against  it,  at  the  end  of  a  protracted  and  costly  litigation,  its 
credit  was  so  impaired  that  a  drain  of  deposits  set  in,  which  at  length 
compelled  it  to  close  its  doors.  This  event  created  immense  excitement; 
far  exceeding  that  of  the  former  occasion.  It  developed,  indeed,  into  a 
complete  panic.  For  one  or  two  days  our  counter  in  Toronto  was  be- 
sieged as  before,  but  by  a  more  excitable  crowd,  and  what  was  far  more 
sertous,  a  considerable  drain  of  deposits  set  in.  Any  one  of  these  would 
take  more  out  of  the  bank  in  a  minute  than  the  whole  excited  crowd  of 
noteholders  would  in  an  hour.  While  the  panic  prevailed,  there  was  great 
danger  of  one  or  two  other  banks  closing  their  doors.  We  were  in  a 
strong  position  ourselves,  and  determined  to  make  common  cause  with 
these  weaker  banks,  as  we  knew  they  were  sound.  We  therefore  kept 
supplying  them  with  gold,  as  these  exciting  days  passed  on;  ordering  up 
large  supplies  by  special  messenger  from  Montreal,  night  after  night. 
A  large  part  of  the  gold  we  paid  away  went  into  the  Bank  of  Montreal, 
as  did  also,  most  of  the  money  withdrawn  from  the  other  banks.  The 
Finance  Minister  in  Ottawa  was  appealed  to,  but  he  refused  to  intervene; 
after  which  a  telegram  arrived  from  some  friends  of  the  banking  interest 
in  Montreal,  advising  the  Toronto  banks  to  suspend  specie  payments.  A 
consultation  of  bank  directors  was  held  in  the  midst  of  the  excitement,  to 
consider  this  projjosal.  I  was  not  present  at  the  consultation,  l>eing  only 
a  comparatively  young  banker,  but  when  informed  by  the  president  of 
what  was  going  on,  I  protested  and  remonstrated  in  the  strongest  man- 
ner against  such  a  step;  and  declared  that  rather  than  do  that,  we  ought 
to  pay  out  the  last  dollar  of  gold  we  had.  The  next  day  was  Sunday, 
which  aiforded  a  breathing  time;  and  on  Monday  morning,  to  our  great 
relief,  we  learned  that  the  Premier,  Sir  John  Maedonald,  overriding  the 
advice  of  his  Finance  ISIinister,  had  determined  to  intervene,  and  ])ut  a 
stop  to  the  panic.  He  gave  orders  that  every  Custom  House  and  Post 
Office  in  Ontario  should  be  telegraphed  to,  directing  them  to  take  the 
notes  of  all  the  banks  whose  doors  were  open.  On  this  becoming  known, 
the  panic  ceased  at  once;  and,  politics  apart,  I  have  always  considered 
that  the  country  owed  a  deep  debt  of  gratitude  to  Sir  John  for  his 
conduct  on  that  occasion. 

This  excitement  over,  matters  bt^gan  to  jnirsuo  their  usual  eoiirse.  The 
country  was  prosperous;  and  business  on  the  whole,  sound.  The  banks 
to  whom  we  Jiad  loaned  the  gold,  soon  repaid  it,  and  our  business  went 
on  as  quietly  as  ever.  As  to  the  Conntureial  Bank,  after  some  excited 
meetings  of  stockholders,  projiosnls  were  made  by  two  of  the  Montreal 
banks  ft)r  the  purchase  of  its  whole  assets.  A  sort  of  rivalry  arose  be- 
tween the  Bank  of  Montreal  and  the  Merchants'  Bank  on  this  occasion. 
One  bid  after  anotlier  was  made,  and  finally  the  offer  of  the  Merchants' 
Bank  was  accepted.     This  offer  was   to  assume  all  the  liabilities  of  the 


HEAD   OFFICE   ^MANAGEMENT   IN   TORONTO.         SM) 

Commevcial  Bank,  and  to  pay  the  stockholders  33  1-3  per  cent,  of  their 
shares  in  the  stock  of  the  Merchants'  Bank.  It  would  liave  been  far  bet- 
ter for  tlie  stockholders  of  tlie  Connnereial  Bank  to  have  taken  the  offer 
of  the  Bank  of  ?^Iontreal ;  and  I  believe  it  would  have  been  better  for  the 
Merchants'  Bank  to  have  had  nothinp;  to  do  with  it.  For  subsequent  in- 
side experience  led  me  to  the  conclusion  that  the  Merchants'  Bank  lost  a 
j?ood  deal  of  money  by  it.  But  the  purchase  enabled  that  bank,  which 
then  had  no  branches  at  all,  to  establish  itself  with  a  business  ready-made 
to  ts  hand,  in  numbers  of  town.s  and  cities  in  Ontario;  and  laid  the  founda- 
tion of  tliat  widely  extended  business  with  which  I  had  to  deal  in  sub- 
sequent years..  The  liquidation  of  the  old  assets  of  the  Commercial  Bank 
caused  a  prodigious  amount  of  labor  to  fall  upon  the  officers  of  the  Mer- 
chants' Bank:  and  along  with  a  considerable  accession  of  good  business 
It  also  acquired  a  large  amount  that  turned  out  doubtful  and  bad,  partly 
it  may  be  said,  by  reason  of  the  "hard  times"  that  subsequently  followed. 

Organization  of  Nkw  Banks. 

During  the  period  of  my  service  in  Toronto,  and  while  gold  was  at 
a  premium,  the  General  ^Manager  of  the  Bank  of  Montreal,  for  reasons 
of  haute  finance,  determined  on  a  policy  of  contraction  of  discounts 
among  all  its  Ontario  offices.  The  bank  transferred  the  money  to  New 
York,  and  made  large  profits  out  of  it.  The  pressure  was  severely  felt 
for  a  time,  but  it  resulted  in  the  offering  to  the  Bank  of  Toronto  of  a 
large  amount  of  new  business.  Most  of  the  accounts  offered  were  ac- 
cepted; and  we  thereby  took  our  share  in  relieving  the  pressure  upon  the 
commercial  community.  This  policy  had,  however,  very  important  con- 
sequences, such  as  could  scarcely  have  been  foreseen. 

The  Barik  of  Montreal,  in  its  Toronto  office,  was  under  the  local 
direction  of  a  very  prominent  member  of  the  mercantile  community. 
AVhen  a  policy  of  contraction  was  determined  upon  and  continued,  he  con- 
ceived the  idea  of  obtaining  a  Charter  for  a  new  hank.  He  had  no 
difficulty  in  carrying  out  the  idea,  as  he  was  influential  in  Parlia- 
ment, as  well  as  in  banking.  The  charter  was  obtained,  the  stock  sub- 
scribed, an  influential  board  of  directors  formed,  and  thus  was  launched 
into  being  The  Canadian  Bank  of  Commerce.  This  bank  in  the  course 
(»f  a  few  years  became  the  largest  bank  in  Ontario  in  respect  to  both 
capital  and  business.  It  also  absorbed  after  a  time  one  of  the  older 
banks  in  Ontario,  the  Gore  Bank  in  Hamilton.  During  the  last  few 
years  it  has  still  further  enlarged  its  operations  by  taking  over  the  Bank 
of  British  Columbia  with  its  branches  on  the  Pacific  coast  from  Victoria 
to  San  Francisco,  and  also  one  of  the  banks  of  the  Maritime  Provinces 
with  its  headquarters  in  Haliuix,  and  branches  extending  all  over  Nova 
Scotia.  It  had  not  been  long  established  when  it  opened  an  office  in 
London,  England,  and  also  in  New  York.  The  Eondon  office  ceased  to 
do  business  for  some  vears,  but  as  the  Bank  of  Britisli  Columbia  had  its 


350  BAXKIXG    AND    COMMERCE. 

headquarters   in    London,   tJic   Bank  of   Commerce    assumed   its   business 
there,  a)id  has  ever  since  been  represented  in  the  Metropolis. 

After  some  time  it  was  rumored  that  the  vice-president  of  the  Bank 
of  Commerce  was  also  about  to  apply  to  Parliament  for  a  charter,  and 
establish  another  bank.  He  was  also  a  man  of  wealth  and  position,  and 
easily  obtained  a  charter,  and  subscriptions  of  a  sufficient  amount.  A 
body  of  influential  men  gathered  around  him,  and  thus  was  launched  the 
Dominion  Bank,  well  known  to  be  one  of  the  most  successful  and  pros- 
perous of  Canadian  banking  institutions. 

Another  director  of  the  Bank  of  Commerce  followed  upon  the  same 
path  but  in  a  somewhat  different  manner.  There  had  long* existed  in  St. 
Catherines,  a  prosperous  town  in  the  Niagara  District  of  Ontario,  a  bank 
called  the  Niagara  District  Bank.  It  had  been  on  the  whole  well  man- 
aged. Its  directors  were  influential  men.  It  had  branches  in  the  western 
peninsula  of  Ontario.  Some  conferences  and  consultations  took  place 
between  its  directors  and  certain  men  of  wealth  in  Toronto,  which  re- 
sulted in  the  establishment  of  the  Imperial  Bank,  with  its  headquarters 
in  that  city.  This  bank  absorbed  the  business  and  branches  of  the 
Niagara  District  Bank;  and  the  St.  Catherines  office,  after  being  the  head 
office  of  the  former  bank,  became  a  branch  of  the  Imperial  Bank.  This 
bank  also  has  had  a  career  of  uninterrupted  prosperity,  and  after  pay- 
ing continuously  good  dividends  has  accumulated,  like  the  last,  a  rest 
nearly  equal  to  its  capital.  There  thus  sprang  out  of  this  policy  of  con- 
traction on  the  part  of  the  Bank  of  Montreal  three  of  the  most  pros- 
perous and  flourishing  of  the  banks  of  Canada. 

A  similar  career  of  success,  however,  did  not  attend  another  institu- 
tion established  about  the  same  time.  The  Federal  Bank,  after  a  check- 
ered career,  finally  ceased  to  exist,  but  wound  up  its  afl'airs  without  loss. 
Most  of  its  business  was  taken  over  by  a  new  organization  called  the 
Trader's  Bank  which  has  been  doing  a  quiet  business  for  many  years. 
Another  of  the  banks  which  obtained  charters  at  the  time  when  charters 
were  so  readily  granted  by  Parliament,  was  originally  named  the  St. 
Lawrence  Bank.  It  was  not,  however,  well  managed  in  the  first  instance, 
and  was  nearly  coming  to  a  stop.  It  was  then  taken  up  by  an  able  officer 
of  another  bank;  a  man  who  had  been  well  trained  in  banking;  and  under 
another  name,  that  of  the  Standard,  it  has  had  a  prosperous  career  ever 
since. 

I  was  cashier  of  the  Bank  of  Toronto,  while  all  those  changes  were 
going  on,  quietly  pursuing  my  own  business  and  maintaining  friendly 
relations  with  the  managers  and  directors  of  these  institutions. 

Unfortunate  Speculations  of  a  Manager. 

During  the  time  that  the  war  before  referred  to  was  going  on,  we  had  a 
very  unpleasant  experience  with  one  of  our  managers,  who  had  unfortu- 


HEAD   OFFICE   MANAGEMENT    IN    TORONTO.  351 

nately  become  connected  with  a  number  of  Southern  gentlemen,  and  liad 
imbibed  their  views  as  to  the  course  of  gold.  They  were  fully  ])crsuaded 
that  gold  would  rise  to  a  far  higher  figure  than  it  had  ever  attained.  He 
was  induced  to  join  in  a  little  speculation;  and  as  is  often  the  case,  this 
was  the  beginning  of  a  troublous  course  which  finally  ended  in  his  ruin. 
Speculations  went  on  increasing.  A  broker  was  concerned  in  them  also. 
Large  advances  came  to  be  made,  but  they  were  so  carried  on  as  to  be 
concealed  for  a  time.  At  length,  however,  the  great  events  which  brought 
the  war  to  a  close  took  place.  Gold  rapidly  fell.  It  soon  became  evident 
that  the  game  was  nji.  The  concealment  could  be  carried  on  no  longer. 
It  fell  to  my  lot  to  handle  this  unpleasant  business,  and  I  proceeded  to 
Montreal  for  the  purpose.  Investigation  speedilv  revealed  the  state  of 
matters.  This  was  followed  by  the  manager's  resignation  and  with- 
drawal from  the  service.  I  remained  in  Montreal  some  time  to  attend  to 
the  winding  up  of  the  affair,  taking  actual  charge  of  the  branch,  until  a 
new  manager  was  appointed,  becoming  thereby  very  familiar  with  the 
business  of  Montreal  and  acquiring  m  t  xpcrience  in  exchange  operations 
such  as  was  not  to  be  had  in  Toronto. 

Retiremext  iROM  Baxkixg. 

After  the  agitation  to  preserve  the  circulation  of  the  bank  (sec  next 
chapter),  T  felt  a  great  reaction  setting  in.  And  a  conviction  grew  upon 
me  that  I  ought  in  the  course  of  a  few  ^-ears  to  devote  the  rest  of  my 
life  to  other  than  monetary  pursuits.  I  had  been  active  for  years  in  the 
work  of  the  Church  to  which  I  belonged,  and  also  in  the  work  of  the 
Young  Men's  Christian  Association,  and  looked  forward  to  n  time  when 
the  burden  of  the  bank  could  be  laid  down  and  my  whole  time  given  to 
such  work  as  this.  It  was  many  years  before  the  opportunity  came,  but 
it  did  come,  or  seemed  to  come,  some  years  afterwards.  In  the  year  1874^ 
a  period  of  depression  set  in  over  the  financial  world,  and  the  full  force 
of  it  was  felt  in  Canada.  The  lumber  and  timber  interests  were  affected 
most  severely;  and  the  depression  in  this  line  continued  year  after  year, 
as  is  common  in  a  trade  where  business  moves  in  cycles.  Still  the  busi- 
ness of  the  bank  went  on  with  a  fair  amount  of  prosperity.  The  average 
of  losses  increased,  but  with  the  vigilance  and  co-operation  of  a  good 
staff  of  managers,  v.e  were  able  to  prevent  anything  really  serious  de- 
veloping. The  times,  however,  were  depressing,  and  the  pressure  on  my 
own  mind  was  constantly  increasing.  At  length  about  the  middle  of  1876 
I  conceived  that  I  might  honorably  lay  the  burden  down  by  the  end  of 
the  year.  In  fact,  I  began  to  feel  that  I  was  getting  on  in  years,  and 
ought  to  relinquish  the  charge  of  the  bank  to  a  younger  man.  At  that 
time,  so  far  as  personal  feeling  goes,  it  seemed  to  me  that  I  was  older 
than  I  was  when  T  retired  from  the  Merchants'  Bank  twenty-five 
years  afterwards. 

The  board  allowed  me  to   retire  when  they   saw  that  my  mind   was 


S.'JS  BANKING    AND    COMMERCE. 

made  up.  though  I  believe  they  thought  I  would  have  done  wisely  to 
stick  to  my  own  business. 

But  they  presented  me  with  a  service  of  plate,  on  which  some  words 
were  engraved,  which  I  have  always  esteemed  tenfold  more  than  the 
silver  itself,  valuable  though  it  was. 

After  speaking  of  the  services  I  had  rendered  to  the  bank,  during  my 
tenure  of  office,  they  went  on  to  say  that  the  presentation  was  made: 

"To  give  them  also  the  opporlunity  of  referring  to  the  prominent  and 
active  part  he  has  taken  in  the  legislation  respecting  Banking,  and  to 
record  their  opinion  that  to  him  the  Banks  one  several  of  their  most 
vahiahle  privileges.'' 

The  last  words  are  perhaps  too  flattering,  inasmuch  as  others  took  a 
very  influential  part  in  the  work;  but  tliere  was  undoubtedly,  at  one  time, 
a  crisis,  as  is  related  in  the  next  chapter,  when  the  action  I  took  probably 
saved  the  whole  position. 


CHAPTER   V. 

NEGOTIATIONS    WITH    THE     GOVERNMENT    RESPECTING 
CIRCULATION. 

ClRCr.MSTAXCES    OF    THE    CoUXXRV OPPOSITION    TO    GOVERNMENT    PaPER 

Money — Proposal  to  Secure  Bank  Notes  by  Government  Bonds 
— Specific  Objections — New  Law  Respecting  Circulation — 
Great  Safety  of  the  Bank  Notes. 

THIS  experience  is  related  in  rather  full  detail,  as  it  concerns  the 
development  of  that  Canadian  system  of  circulation  M'hich  is 
admitted  to  be  one  of  the  best  in  tlie  world.  It  also  traces  the 
origin  of  the  present  Canadian  Banking  Act. 

Bj'  far  the  most  important  events  that  transpired  during  the  period 
referred  to  in  the  last  chapter  were  negotiations  with  the  Government 
respecting  the  circulation  of  the  banks. 

It  has  already  been  stated  that  a  certain  loss  had  fallen  upon  all  the 
holders  of  Bank  of  L'pper  Canada  notes,  at  the  time  of  its  failure.  The 
loss  to  any  individual  or  firm  was  of  no  great  importance,  but  it  was 
sufficient  to  create  a  desire  for  a  better  secured  currency.  The  Finance 
Minister  of  the  day,  Mr.  Gait,  afterwards  Sir  Alexander  Gait  and  High 
Commissioner  of  Canada  to  England,  had  long  held,  as  a  matter  of 
theory,  that  all  circulating  notes  of  any  country  should  be  issued  by  the 
Government.  This  theory  was  held  by  a  certain  school  of  political 
economists,  of  whom  he  was  one,  and  the  failure  of  the  Upper  Canada 
Bank  seemed  to  afford  a  favorable  opportunity  for  putting  the  theory 
into  practice.  He  matured,  therefore,  an  elaborate  scheme  for  the  sub- 
stitution of  Government  notes  for  the  circulating  notes  of  the  banks  of 
Canada.     This  was  before  the  Confederation  of  the  Provinces. 

The  Canada  of  that  time  consisted  simply  of  the  Provinces  of  Ontario 
and  Quebec,  but  then  called  Upper  and  Lower  Canada.  Mr.  Gait's 
scheme  was  approved  by  his  colleagues,  but  before  bringing  in  a  bill 
to  give  it  effect,  he  consulted  various  members  of  the  banking  interest 
uith  regard  to  it. 

Circumstances  of  the  Country. 

To  enable  the  reader  to  understand  the  bearing  of  such  a  measure  on 
the  finances  of  the  Government,  the  circumstances  of  the  country  will 
need  to  be  considered.  Canada,  at  that  time  (about  186;))  was  still  feel- 
ing the  effect  of  the  terrible  revulsion  of  1857.  I  had  always  tliought 
that  it  would  take   from  eight   to  ten  rears   for  the   country   to  recover 


354-  BANKING    AND    COMMERCE. 

from  it.  During  this  period  the  finances  of  the  Government  were  in  a 
really  deplorable  condition.  The  Finance  Minister  had  to  report  deficits 
year  after  year  ad  nauseam.  The  accoiuit  of  the  Government  with  its 
London  agents  was  heavily  overdrawn;  and  there  can  still  be  read  in  blue 
books  of  the  time  letters  from  the  Glyns  and  Barings,  which  are  calcu- 
lated to  make  patriotic  ears  tingle  with  shame.  Our  Government  was 
addressed  by  its  London  agents  in  exactly  the  same  terms  which  a  bank 
employs  to  an  impecunious  trader  when  demanding  payment  of  overdue 
paper.  Of  course,  they  refused  all  further  advances;  they  reported  also 
that  it  was  practically  impossible  to  place  any  more  bonds  of  Canada 
upon  the  market.  Though  they  were  six  per  cent,  bonds,  to  attempt  to 
float  more  would  send  them  to  a  heavy  discount,  a  contingency  which  no 
Finance  ^linister  would  dare  to  face.  Under  these  circumstances  it  was 
not  surprising  that  the  account  of  the  Government  with  its  Canadian 
bankers  was  overdrawn  too.  The  recurring  deficits  of  the  finances  were 
the  occasion  of  increased  taxation,  but  it  was  impossible  to  load  the 
country  more  heavily  in  this  way  in  its  then  condition.  Continued  deficits 
v»-ere  therefore  largely  reflected  in  the  steadily  increasing  debt  to  the 
Bank  of  jNIontreal.  By  the  time  the  Finance  Minister's  scheme  was 
matured,  this  bank  stood  in  the  same  position  to  the  Government  of 
Canada  that  the  Bank  of  England  stood  to  the  Government  of  England. 
Its  whole  capital,  or  thereabouts,  was  lent  to  the  Government;  not  a  bad 
position  to  be  in,  certain^,  in  one  respect;  and  the  authorities  of  the 
bank  by  which,  practically,  must  be  understood  Mr.  King,  the  General 
Manager,  knew  well  how  to  make  the  most  of  it  to  their  own  advantage. 
But  the  Government  still  needed  more  money;  and  matters  had  reached 
a  point  when  it  was  not  convenient  for  the  bank  to  increase  its  advances. 
Such  were  the  conditions  prevailing  at  the  time  when  the  scheme  was 
submitted  by  which  bank  circulation  would  be  abolished,  and  replaced 
by  the  notes  of  the  Government. 

Opposition  to  Govkrnmext  Papeu  Money. 

The  Bank  of  Montreal  gave  in  its  adhesion  at  once,  as  might  be 
expected.  The  adoption  of  the  scheme  M'ould  not  necessitate  any  ma- 
terial change  in  the  course  of  its  business,  and  the  very  able  financier 
M'ho  was  at  its  head,  saw,  in  its  working,  large  opportunities  of  increasing 
the  profits  of  the  bank.  But  it  was  far  otherwise  with  the  rest  of  the 
banks,  and  particularly  with  those  carrying  on  the  business  of  Upper 
Canada.  I  gave  careful  study  to  tlie  scheme  as  it  Mould  aff"ect  the  Bank 
of  Toronto,  and  became  convinced  that  to  adopt  it  would  compel  us  to 
make  such  a  curtailment  of  our  discounts,  as  would  cause  serious 
disturbance  and  embarrassment  to  the  whole  circle  of  our  customers. 
And  not  only  this ;  it  would  seriously  cripple  our  power  of  assisting  in 
that  movement  of  the  crops  which  M'as  then,  even  more  than  now,  the 
foundation  of  so  much  of  the  business  of  Canada.     The  Bank  of  Toronto 


NEGOTIATIONS    RESPECTING   CIRCULATION.  3r,r> 

had  tlicn,  I  think,  a  larger  share  of  the  grain  and  lumber  business  of 
Ontario,  than  any  other  bank;  and  I  was  filled  with  alarm  at  the  con- 
sequences of  such  an  Act  to  us,  if  adopted  by  Parliament.  Having  be- 
come thus  convinced,  I  obtained  permission  from  the  board  to  go  down 
to  Ottawa  to  confer  w^ith  the  Finance  Minister  on  the  subject.  Mr, 
Gait  received  me  very  courteously,  for  he  well  knew  the  position  of  the 
bank  I  represented.  I  carefully  abstained  from  any  discussion  of  the 
merits  of  a  Government  currency,  per  sc;  well  knowing  that  in  a  matter 
of  that  kind,  I  should  be  no  match  for  a  man  of  ^Ir.  Gait's  capacity. 
He  was,  perhaps,  the  most  brilliant  of  our  many  able  Finance  Ministers; 
and  almost  the  equal  of  Gladstone  in  the  ability  with  which  he  discussed 
hnancial  questions  in  the  House.  I,  therefore,  confined  myself  purely 
to. a  statement  of  the  eflect  of  this  measure  upon  ourselves,  and  upon  all 
the  banks  who  Avere  doing  the  business  of  the  agricultural  and  lumbering 
interests  of  the  country.  I  pointed  out  that  the  measure  would  also 
necessitate  a  heavv  curtailment  of  discounts  to  the  mercantile  community 
of  Upper  Canada;  that  such  curtailment  would  inevitably  bring  about 
embarrassments  and  failures;  that  the  country  was  only  just  recovering 
from  the  sliock  of  the  revulsion  of  1S57  and  could  not  bear  any  further 
disturbance.  I  further  said  that  quite  apart  from  the  immediate  effect 
of  the  measure,  it  would  cripple  for  all  time  the  power  of  the  banks  to 
provide  the  means  of  moving  the  crops  in  the  fall,  and  carrying  lumbering 
operations  through  the  winter. 

This  was  the  general  strain  of  my  side  of  the  conversations  which 
ensued.  I  found,  however,  that  he  was  full  of  the  idea  of  obtaining 
more  money  for  carrying  on  the  business  of  the  Government;  and  un- 
doubtedly the  measure  he  proposed  would  have  effected  that  end,  at 
least.  So  I  spent  much  time  in  the  library  of  the  House  of  Commons 
endeavoring  to  think  out  some  plan  for  relieving  the  Government  with- 
out damaging  the  banks.  I  was  a  young  manager  at  that  time,  and 
found  it  a  very  difficult  task;  in  fact,  it  was  beyond  me.  But  one  thing 
I  did  understand,  viz.,  the  bearing  of  his  scheme  upon  the  business  of  the 
country.  That  it  would  inflict  incalculable  damage,  I  was  certain.  It 
was  easy  to  reply  that  the  Bank  of  Montreal  was  read}'-  to  fall  in  with 
the  scheme;  but  the  position  of  the  Bank  of  Montreal  was  as  difl'erent 
from  our  own  as  that  of  tlie  Bank  of  England  from  the  position  of  an 
ordinary  London   bank. 

The  final  point  to  which  I  directed  our  conversation  was  a  strong 
appeal  io  make  the  measure  optional  and  not  compulsory. 

I  have  no  doubt  that  other  Western  bankers  brought  influence  to 
bear  on  Mr.  Gait  (tliough  I  never  met  any  of  them  in  Ottawa),  for 
when  the  bill  was  brought  before  Parliament  we  found  to  our  great  sat- 
isfaction, that  this  provision  was  expressly  included. 

The  only  bank  that  fell  in  with  the  measure  was  tlie  Bank  of 
JNIontreal.  Very  favorable  terms  were  offered,  and  its  circulation  was 
relinquished.     For  several  years,  it  issued  Government  notes  exclusively. 


S5(i  BANKING    AND    COMMERCE. 

The  bill  provided  for  considerable  reserves  of  gold  to  be  kept  against 
these  notes,  and  Commissioners  were  appointed,  of  vhom  I  was  one,  to 
make  periodical  examinations  of  the  gold  on  hand.  The  reserve  in 
Toronto  was  in  the  vaults  of  the  Bank  of  Montreal;  and,  odd  as  it 
seemed,  another  bank  manager  and  myself  visited  the  bank  monthly, 
entered  the  safe,  overhauled  and  counted  the  gold  exactly  as  one  of  their 
own  inspectors  would  have  done. 

The  Western  banks  did  not  like  these  Government  notes,  though  they 
were  legal  tender.  But  Mr.  King  was  determined  that  these  banks  should 
carry  a  portion  of  the  issue,  and  took  characteristic  measures  to  bring  it 
r.bout.  The  Bank  of  Toronto  was  strong  enough  to  stand  out  for  a  time. 
But,  later  on,  J  recommended  that  we  should  fall  in,  as  we  could  do  it 
without  detriment.     And  this  we  did. 

Some  time  after  the  passing  of  the  act  it  was  rumored  that  the  Com- 
mercial Bank  of  Canada  was  about  to  fall  in  with  its  provisions  and  re- 
linquish its  circulation.  I  could  not  believe  it.  It  would  have  been  a 
suicidal  step  for  them  to  take.  And  as  it  was  never  taken,  the  rumor  was 
probably  unfounded. 

The   Attempt   to   Ixtrodlce   the    National    Bank    SvsTEist    of    the 
United  States  Into  Canada. 

Matters  remained  in  this  position  for  several  years.  Meantime  Mr. 
Gait  had  resigned  and  been  succeeded  by  Mr.  Rose  of  Montreal.  Under 
his  auspices  another  attempt  and  of  a  far  more  determined  character, 
ivas  made  by  the  Government  to  change  the  basis  of  the  circulation.  At 
that  time  the  system  of  the  United  States  was  in  universal  favor,  and  so 
far  as  the  providing  of  a  safe  currency  for  the  whole  country  was  con- 
cerned, it  undoubtedly  deserved  it.  But  specie  payments  were  still 
suspended,  and  many  inconveniences  and  drawbacks  which  have  since 
developed  themselves  were  entirely  unknown.  It  cannot  be  wondered  at 
therefore,  that  an  idea  began  to  prevail  with  the  members  of  the  Govern- 
ment, that  the  system  miglit  be  introduced  with  advantage  into  Canada. 
It  was  based,  as  has  been  said,  upon  the  holding  of  Government  securi- 
ties by  every  bank  for  the  full  amount  of  its  circulation.  Now  the  Gov- 
ernment of  Capada  had  already  experienced  great  difficulty  in  the  trou- 
blous times  just  referred  to,  of  floating  more  of  its  bonds  in  England.  It 
would  therefore,  be  of  great  advantage  if  the  whole  bank  circulation 
were  required  to  be  based  on  Government  securities;  for  in  that  case, 
every  existing  bank  would  be  compelled  to  make  large  purchases  of 
debentures;  and  every  new  bank  organized  in  the  country  would  fall 
under  the  same  rule.  Immense  sums  of  money  (immense  for  those  days, 
though  they  would  not  be  called  such  now)  would  thus  flow  into  the 
coffers  of  the  Government,  and  relieve  the  Finance  Minister  from  embar- 
r.issment.  The  idea  was  extremely  attractive;  but  like  some  other 
theories,  it  omitted  to  take  into  account  the  most  dominant  factor  of  the 


NEGOTIATIONS    RESPECTING    CTRCUI.ATION.  357 

position,  viz.,  how  to  obtain  the  money  to  purdiasc  such  an  enormous 
amount  of  Government  debentures  as  would  be  required.  For  it  would 
be  absurd  to  supjiosc  that  the  Government  Mould  furnish  them  on  eri  dit. 
The  bearing  of  this,  however,  was  not  well  understood  at  first. 

The  bill  to  effect  this  object  was  prepared  with  great  skill,  and  was 
brought  forward  by  the  Finance  Minister  as  a  Government  measure. 
This  rendered  it  all  the  more  dangerous;  for  the  Government,  with  Sir 
John  Maedonald  at  its  head,  had  a  large  majority  both  in  the  House  of 
Commons  and  in  the  Senate. 

It  was  incumbent  upon  me,  as  cashier  of  the  Bank  of  Toronto,  to 
carefully  study  the  measure,,  which  I  did,  and  the  conclusion  I  came  to 
was  this,  that  whilst  it  would  not  affect  our  jjrofits  to  anything  like  the 
degree  which  Mr.  Gait's  measure  would  have  done,  it  would  have  pre- 
cisely the  same  effect  in  compelling  us  to  reduce  our  discounts  to  such 
an  extent  as  to  cause  very  serious  embarrassment  to  our  customers. 
Under  its  provisions,  we  would  be  compelled  to  buy  Government  securi- 
ties (and  that  at  an  enhanced  price,  because  of  the  new  demand),  not 
simply  for  the  whole  amount  of  our  capital,  but  for  the  whole  amount 
of  our  circulation  at  its  highest  point;  and  also  in  addition,  for  the 
amount  of  the  notes,  with  which  we  would  carry  on  our  daily  business. 
This  was  an  alarming  prospect  indeed,  as  I  pointed  out  to  the  directors; 
for  we  would  have  to  get  the  money  from  our  customers.  They  fully 
agreed  that  to  compel  our  customers  to  pay  up  such  an  amount  would 
cause  great  distress  and  bring  about  numerous  failures.  In  fact,  it  would 
produce  exactly  the  condition  of  which  I  had  spoken  to  Mr.  Gait.  If  it 
was  suggested  that  our  customers  could  get  accommodation  at  other 
banks,  the  reply  obviously  was,  that  other  banks  would  be  in  the  same 
position  as  ourselves,  with  one  exception.  I  therefore,  recommended  the 
members  of  the  board  to  do  their  utmost  to  oppose  the  measure  as  in- 
dividuals, and  to  bring  every  influence  in  their  power  to  bear  upon  the 
Government  to  induce  them  to  abandon  it.  I  did  this,  being  well  aware 
that  some  of  them  were  influential  supporters  of  the  Government.  It 
was  a  case,  I  said,  for  putting  mere  party  considerations  aside,  and  look- 
ing at  matters  from  a  purely  commercial  and  financial  standpoint. 

It  soon  api^eared  that  other  banks  were  coming  to  the  same  con- 
clusion, not  only  in  Ontario,  but  in  Quebec  and  the  Maritime  Provinces. 
Correspondence  and  conversations  only  deepened  tlie  impression  of  the 
disastrous  consequences  that  the  measure  would  entail,  if  forced  upon  us. 
All  the  banks  in  Western  Canada  were  a  unit  in  this  opinion,  as  well  as 
all  the  banks  in  the  Maritime  Provinces.  Nearly  all  the  banks  with  their 
headquarters  in  the  province  of  Quebec,  had  this  opinion  also.  And  as 
Parliament  was  then  sitting  it  was  determined  to  hold  a  conference  of 
the  banks  that  held  these  views,  in  Ottawa. 

I  attended  this  conference,  practically  at  the  risk  of  my  life.  I  was 
lying  in  bed,  slowly  recovering  from  an  attack  of  malarial  fever,  when 
the  dav  for  the  conference  was   approaching.     An   influential   friend,   a 


358  BANKING    AND    COMMERCE. 

Senator  and  a  strong  supporter  of  the  Go\ernment,  who,  however,  shared 
our  views  on  this  question,  offered  to  provide  a  special  car  on  the  Grand 
Trunk  to  take  me  down  to  Ottawa.  I  then  determined  to  go,  coiite  qui 
coute.  My  wife  accompanied  me  as  a  nurse.  On  arriving  at  Ottawa,  I 
dragged  myself  up  to  the  Committee  room  of  the  House  of  Commons, 
wliere  the  meeting  was  to  be  held,  and  found  a  number  of  influential 
gentlemen  assembled,  many  of  them  Senators  or  Members  of  Parlia- 
ment;  all  of  them  bank   directors. 

There  were  also  a  few  managers  present.  The  chair  was  taken  by 
the  Hon.  Mr.  Eerrier  of  Montreal,  a  local  director  of  the  Bank  of 
British  North  America.  But  the  meeting  was  very  much  at  "sixes  and 
ievens."  In  was  soon  evident  that  very  few  of  the  gentlemen  had  given 
much  attention  to  the  question;  there  was  also  a  division  amongst  them 
as  to  how  far  some  of  them  would  go  in  opposing  what  was  distinctly  a 
Government  measure.  It  Avas  hard  for  a  politician  then,  just  as  it  is 
now,  to  separate  from  his  party;  and  the  sentiment  was  strongly  ex- 
pressed by  some,  both  then  and  subsequently,  that  though  it  might  be  a 
bad  measure,  they  could  not  see  their  way  to  oppose  it  in  Parliament. 
Some  of  the  gentlemen,  however,  were  Senators,  and  therefore,  much 
more  independent  than  the  Members  of  the  lower  House.  Tlie  upshot 
of  the  meeting  was,  that  it  was  desirable  to  form  an  association;  the 
object  being  to  preserve  the  free  circulation  of  the  banks.  Of  this 
association  I  was  requested  to  act  as  secretary.  The  organization  was 
very  informal ;  no  president  was  appointed,  no  funds  subscribed,  and  no 
rules  adopted.  The  only  thing  that  was  thoroughly  determined  on  was 
to  bring  about,  if  j^ossible,  a  witlidrawal  of  the  measure;  for,  of  its 
defeat,  if  it  came  to  a  real  Parliamentary  contest,  we  had  but  little  hope. 
But  the  strongest  supporters  of  the  Government  were  willing  to  use  their 
private  influence  for  withdrawal. 

Not  a  word  of  this  was  conm^.unieated  to  the  press,  and  not  a  line  of 
our  proceedings  as  an  association  ever  appeared  in  the  news  of  the  day. 
But  some  of  us  did  endeavor,  on  our  own  responsibility,  to  influence  pub- 
lic opinion  through  the  press,  as  will  be  seen.  The  banks  of  Nova  Scotia 
had  deputed  Mr.  Peter  Jack,  cashier  of  the  People's  Bank,  to  represent 
them  in  this  matter.  He  \vas  a  well-educated  banker,  and  liad  studied 
the  question  tlioroughly.  And  being  a  man  of  much  intellectual  force, 
he  carried  great  weight  in  tlie  conferences  we  had  on  the  subject.  But 
iiis  especial  forle  was  in  interviewing  iMembers  of  Parliament,  a  faculty 
that  I  could  lay  little  prttention  to.  I  could,  and  did,  write  in  the  press, 
and  address  meetings  and  conferences.  But  when  it  came  to  interviewing 
])rivate  individuals,  my  tongue  usu.illy  failed  me.  The  President  of  the 
Bank  of  New  Brunswick,  afterwards  raised  to  tlie  Senate  as  the  Hon, 
.My.  Lewin,  a  man  of  great  influence  in  the  city  of  St.  John,  N.  B.,  M-as 
also  active  in  our  cause,  and  rendered  most  valuable  service. 

We  all  liad  our  duties  as  managers  or  directors  to  attend  to,  and  the 
business  of  tlie  banks  was  then  just  as  engrossing  as  it  is  now.     It  was 


NFX;OTIATIONS    RKSPKCTIXG   CIRCULATION.  359 

only  snatches  of  time,  so  to  speak,  that  practical  hankers  could  give  to 
the  agitation  of  this  question. 

Very  little  was  said  about  it  at  our  board  meetings,  and  even  when 
absent  in  Ottawa,  as  I  frequently  was,  I  took  care  to  keep  firm  hold 
of  the  business  of  the  bank  by  corres})ondence.  Fortunately  for  us,  the 
Government  also  had  other  things  to  attend  to,  as  well  as  this  currency 
measure.  To  Sir  John  Macdonald,  it  was  practically  a  side-issue  in  the 
great  current  of  political  events.  There  was  no  political  principle  in- 
volved in  it.  as  he  knew  very  well.  And  when  one  and  another  of  his 
supporters  took  a  <lifferent  view  from  the  Finance  Minister,  it  did  not 
greatly  trouble  him.  He  had  acted  independently  of  his  Finance  Min- 
ister once  before,  and  we  knew  very  well  he  would  do  so  again,  if  circum- 
stances called  for  it.  He  would  not,  therefore,  let  too  much  of  the  time 
of  Parliament  be  taken  up  with  this  measure.  It  was  not  therefore 
pressed  through  as  a  great  political  measure  would  have  been.  We, 
therefore,  had  breathing  time,  and  ojjiiortunity  of  pursuing  our  object  in 
our  own  way. 

Not  that  we  were  allowed  to  do  this  uninterruptedly.  The  able  and 
astute  General  Manager  of  the  Bank  of  Montreal  Avas  then  at  the  height 
of  his  great  fame.  He  was  a  perfect  genius  in  finance,  and  was  man- 
aging the  bank  magnificently,  making  immense  profits,  paying  large  divi- 
dends, adding  heavy  sums  to  the  rest,  and  increasing  the  power  and  in- 
fluence of  the  bank  day  by  day.  And  an  influential  Imard  of  directors 
was  with  him. 

He  had  studied  the  measure  as  carefully  as  we  had;  indeed,  there 
was  no  doubt  the  Finance  :Minister  had  consulted  him  in  preparing  it; 
as  was  natural  he  should,  the  bank  of  Montreal  being  the  bankers  of  the 
Government.  The  measure,  had  it  passed,  would  have  had  great  ad- 
advantages  for  the  Bank  of  Montreal,  both  present  and  prospective.  It 
would  have  compelled  niatiy  merchants  and  men  of  business  to  apply 
tor  accommodation  to  the  bank,  and  to  transfer  their  accounts  to  it.  In 
fact,  it  would  have  gone  further.  The  banks  themselves  would,  in  many 
instances,  have  been  put  into  such  a  position,  that  they  could  not  carry 
through  their  fall  and  winter  business  without  rediscounting.  And  that 
must  be  largely  with  the  Bank  of  Montreal.  This  would  have  raised 
the  bank  in  many  respects  to  the  position  occupied  by  the  Bank  of  Eng- 
land  in   England. 

It  cannot  be  wondered  at  then  that  Mr.  King  lent  liis  utmost  influ- 
ence to  the  side  of  the  Government,  and  moved  all  the  force  at  the  com- 
mand of  the  greatest  bank  in  the  country  to  enable  the  bill  to  be  passed. 
And  as  we  were  endeavoring  to  iuHuenee  individual  members  of  Parlia- 
ment, so  did  he. 

Very  much  could  be  said  on  this  subject,  especially  that  it  would  en- 
sure an  absolutely  safe  currency  for  the  country.  And  if  the  necessary 
contraction  of  discounts  by  the  other  hanks  was  referred  to,  it  was  easy 
to    say   that    merchants   or   their   bankers   might   come    to   the    Bank    of 


S60  BANKING    AND    COMMERCE. 

Montreal  and  get  all  the  discount  they  wanted,  if  security  were  offered. 
Some  might  rejoin  that  one  bank  could  not  carry  all  the  business  of  the 
country,  when  the  reply  would  be  to  quote  the  example  of  England,  and 
Ihe  Bank  of  England  discounting  for  other  banks. 

To  such  an  extent  did  this  line  of  reasoning  prevail  that  several  of 
our  Western  friends  became  quite  cool,  while  the  Bank  of  British  America 
concluded  to  join  its  influence  to  that  of  the  Bank  of  Montreal. 

It  was  an  uphill  fight,  indeed,  with  such  powerful  influences  arrayed 
against  us.  But  the  rest  of  us  determined,  nevertheless,  at  that  time  to 
persevere.  Tlie  bill  was  read  a  first  time.  Later  on  it  was  brought  up 
in  the  House  again,  and  referred  to  a  committee  as  usual. 

It  was  either  at  this  time,  or  before  the  measure  was  prepared  at  all, 
that  the  Government  framed  a  series  of  questions  on  the  subject,  ad- 
dressing them  to  ihe  bank  presidents  and  cashiers  of  the  country,  as 
well  as  to  prominent  members  of  the  mercantile  community.  The  ques- 
tions referred  specifically  to  the  securing  of  bank  notes  by  Government 
s.'curities.  Numerous  rei^lies  were  received.  They  were  all  published 
in  a  Parliamentary  Blue  Book,  and  form  an  interesting  contribution  to 
the  financial  histor}'  of  the  time.  So  far  as  the  adoption  of  the  system  of 
the  American  national  banks  was  concerned,  the  answers  reflected  opin- 
ions colored  by  the  position  of  the  parties  concerned.  My  own  answers 
were  to   this  eft'ect: 

Specific  Objections  to  the  Proposed  Change. 

(1)  That  the  proposed  change  in  the  circulating  system  was  a  revo- 
lutionary one. 

(2)  That  the  whole  system  of  our  legislation  was  founded  on 
British  precedents,  under  which  all  revolutionary  changes  Avere  avoided, 
and  attention  directed  to  the  reform  of  acknowledged  evils. 

(3)  That  in  such  legislation  care  was  always  taken  to  bring  about 
the  least  possible  disturbance  to  existing  conditions. 

(4)  That  no  evils  existed  in  Canada  calling  for  such  a  radical 
change;  for  any  losses  by  bank  circulation  had  been  infinitesimally  small 
in  comparison  with  the  benefits  it  had  conferred  on  the  country. 

(5)  That  the  compelling  of  banks  to  hold  Ciovernment  securities  to 
cover  the  whole  of  their  circulation  would  cause  enormous  disturbance  to 
business,  bring  about  numerous  failures,  cripple  the  power  of  the  banks 
to  facilitate  the  movement  of  the  crops,  and  the  utilizing  of  our  forest 
resources,  and  compel  them  to  close  up  many  of  their  branches,  thereby 
inflicting  heavy  damage  to  the  small  towns  and  farming  districts. 

(())  And  finally,  that  changes  might  be  introduced  into  our  banking 
charters  of  a  conservative  character  which  could  be  brought  about  without 
disturbance,  and  would,  while  preserving  the  essential  element  of  free 
circulation,  render  the  notes  of  tlie  banks  morer  secure. 

We  had  not  then  thought  of  the  great  safeguard  of  jnaking  notes  a 


NEGOTIATIONS   RESPECTING  CIRCULATION.  36f 

lirst  charge  on  assets,  or  of  the  fornintion  of  a  rechinptioii  fiiiid.  Tliesc 
were  later  developments. 

The  answers  of  the  majority  of  practical  bankers  were  to  the  same 
eiFect  as  the  foregoing,  though  the  directors  of  some  of  the  banks  ex- 
pressed themselves  differently.  And  some  merchants  who  had  read 
books  on  political  economy  aired  fanciful  theories  on  the  subject. 

I  amplified  my  own  ideas  in  a  series  of  letters  to  the  Toronto  "Globe," 
under  the  signature  B.  N.  K.  R.,  and  also  addressed  a  large  meeting  of 
the  Board  of  Trade  in  Toronto,  pointing  out  that  it  was  as  much  a  mer- 
chant's question  as  a  banker's.  Mr.  Jack  was  equally  busy  in  Nova 
Scotia,  and  Mr.  Lewin  in  New  Brunswick,  stirring  up  the  business  com- 
munity to  an  appreciation  of  the  evils  to  trade  and  commerce  that  must 
ensue  if  the  measure  passed.  The  managers  of  all  the  banks  in  the  City 
of  Quebec  were  active  in  the  cause,  especially  Mr.  Stevenson  of  the 
Quebec  Bank,  and  Mr.  Vezina  of  La  Banque  Nationale.  Some  of  the 
bankers  of  ^Montreal  were  also  with  us,  and  rendered  good  service,  but 
were  not  so  prominent  in  the  contest  as  Western  men. 

We  were  particularly  careful  to  avoid  even  the  appearance  of  making 
the  matter  a  political  one,  for  we  knew  well,  in  that  case,  there  would  not 
have  been  the  least  chance  of  success.  The  leaders  of  the  Liberal  party, 
which  was  then  in  a  minority,  were  largely  with  us,  as  we  well  knew,  and 
this  purely  on  financial  and  business  grounds.  We  knew  also  from  the  be- 
ginning that  two  of  the  most  influential  supporters  of  the  Government, 
both  residing  in  Toronto,  were  with  us.  One  Avas  a  Senator,  the  other  in 
the  House  of  Commons.  They  held  strong  views  on  the  subject,  and  ren- 
dered invaluable  service  to  our  cause  both  in  and  out  of  Parliament. 
They  both  had  the  ear  of  Sir  John  Macdonald,  and  did  not  fail  to  point 
out  to  him  the  danger  of  alienating  liis  followers,  especially  from  On- 
tario and  the  other  Lower  Provinces.  In  fact,  this  was  really  the  policy 
we  adopted;  viz.: — to  alienate  one  by  one,  on  this  question,  so  many  of 
Sir  John's  supporters  that  if  he  allowed  the  Finance  Minister  to  force 
the  measure  through  the  House,  the  Government  would  be  in  danger  of  a 
defeat. 

We  had.  however,  continually  new  diflienltiis  to  contend  with.  The 
Commercial  Bank  had  failed,  the  effect  of  which  was  still  further  to 
weaken  confidence  in  bank  notes.  One  or  two  Western  banks  were  known 
to  be  weak.  The  directors  of  others  were  afraid,  for  business  reasons,  to 
do  anything  in  opposition  to  the  all-powerful  Bank  of  Montreal,  whose 
branches  were  to  be  found  in  every  important  centre  of  business.  At  one 
time,  when  we  were  having  a  conference  in  Ottawa,  rumors  of  coming 
financial  trouble  were  so  rife  that  the  conference  broke  up  and  some  of 
its  members  went  hastily  home  to  look  after  their  own  interests.  How- 
ever, I  knew  that  the  Bank  of  Toronto  was  all  right,  and  remained 
Quietly  in  Ottawa. 

But  a  feeling  of  uneasiness  began  to  prevail  among  some  of  the 
presidents  of  banks.    Some  of  them  were  politicians;  others  had  interests 


562  BANKING    AND    COMMERCE. 

tliat  appeared  to  them  more  important  tlian  anything  that  could  be  af- 
fected by  this  measure.  This  uneasiness  and  doubt  continued  to  increase 
rather  than  otherwise,  and  it  was  finally  decided  to  hold  another  general 
conference  on  the  subject.  The  place  selected  was  Toronto.  It  was 
largely  attended  by  presidents  and  vice-presidents,  but  only  a  few  cash- 
iers were  present.  I  doubt  if  Nova  Scotia  and  New  Brunswick  were 
represented.  A  long  discussion  ensued;  the  general  trend  of  which  was 
that  it  was  not  desirable  to  continue  the  agitation.  I  was  present  as  sec- 
retary, but  said  very  little.  I  never  could  sj^eak  with  much  effect  to  in- 
dividuals, or  to  a  small  number.  The  meeting  finally  came  to  the  conclu- 
sion to  cease  from  agitating  the  matter,  to  accept  the  principle  of  the 
Bill,  and  to  rely  on  making  amendments  in  detail. 

This  was,  to  me,  a  matter  of  great  mortification,  and  I  went  home 
vexed  and  depressed,  for  I  well  knew  that  to  accept  the  principle  of  the 
Bill  was  to  yield  everything.  The  next  day,  however,  having  recovered 
my  spirits,  and  feeling  more  than  ever  the  momentous  issues  involved, 
and  that  a  definite  crisis  had  arrived,  I  told  the  president,  it  never  would 
do  to  accept  the  conclusions  of  that  conference.  The  passage  of  that  bill 
would  do  the  Bank  of  Toronto  more  harm  than  any  bank  in  the  country. 
We  were  doing  by  far  the  larger  part  of  the  grain  and  lumber  business 
of  the  Western  country,  and  it  was  there  Avhere  the  bill  would  strike.  I 
said,  we  must  keep  up  the  agitation,  and  that  they  really  must  allow  me 
to  go  down  to  Montreal  at  once,  and  see  such  bankers  of  that  city  and 
Quebec  as  M'cre  Avith  us.  I  would  also  correspond  with  Mr.  Jack,  and  ask 
him  to  come  up  from  Halifax  and  meet  us,  as  well  as  the  President  of 
the  Bank  of  New  Brunswick.  They  could  be  thoroughly  depended  upon. 
The  aim  must  be  to  rally  our  scattered  forces,  and  Inspire  with  con- 
fidence the  doubtful  and  wavering.  It  was  a  bold  step  for  a  young  man- 
ager to  take — to  set  myself  in  opposition  to  the  conclusion  of  nearly  all 
the  bank  presidents  of  Ontario;  but  I  knew,  as  a  professional  banker,  the 
nature  of  the  issues  involved  better  than  any  of  these  gentlemen;  and 
determined  that  the  contest  should  not  be  given  up  without  another 
struggle. 

I  went  down  to  Montreal  and  saw  the  men  I  had  proposed  to  meet. 
They  were  all  of  the  same  mind  with  myself;  we  must  continue  the  con- 
test to  rlie  end;  it  was  useless  to  talk  about  compromising  on  the  details 
of  the  bill,  as  was  suggested  in  Toronto.  The  sting  of  the  bill  lay  iti  its 
principle,  and  that  principle  we  would  tight  to  the  end. 

Some  members  of  the  Government  were  disposed  to  ridicule  our  ef- 
forts. "What  is  the  good,"  said  they,  "of  a  parcel  of  small  banks  setting 
themselves  uj)  in  opposition  to  a  strong  Government  like  ours,  and  to 
the  two  strongest  banks  in  the  country?"  We  were,  however,  not  fright- 
ened at  such  talk  as  this;  for  we  knew  well  that  when  it  comes  to  in- 
fluencing votes  in  the  House  of  Commons,  a  number  of  small  banks  acting 
together  can  do  more  than  any  singh-  b/uik.  no  matter  how  ])owerful. 
Thus,  then,  we  determined  to  persevere. 


NEGOTIATIONS    RESPECTING   CIRCULATION.  S6i 

The  session  of  Pcarliament  closed   witliout  niiylliiiij?  heinj?  done,  and 
we  had  another  breathing  space. 


Before  the  next  one  opened,  a  very  important  change  had  taken 
jilace.  The  Finance  Minister,  Sir  John  Rose,  had  resigned  and  gone  to 
England  to  fonnd  the  financial  house  of  Morton,  Rose  &  Co.  Sir  Francis 
Hincks,"  a  prominent  Canadian  politician  of  former  days,  had  just  ar- 
rived in  the  country  from  Barbadoes,  of  which  island  he  had  been  Gov- 
ernor for  some  years.  Some  conferences  between  him  and  the  Premier 
resulted  in  his  re-entering  Parliament,  and  being  offered  the  position  of 
Finance  ^Minister,  His  advent  to  power  raised  our  liopes  considerably. 
He  w;\;s  a  Western  man  of  a  very  practical  turn  of  mind,  had  lived  in 
Toronto  many  years  as  a  man  of  business,  and  thoroughly  knew  the 
wants  and  requirements  of  the  Western  country.  Of  these,  the  late. 
Finance  Minister  knew  practically  nothing.  He  was  a  lawyer  in  Mont- 
real; and  able  man  as  he  was,  the  horizon  of  his  financial  views  was 
largely  bounded  by  INIontreal  interests.  But  Ave  instinctively  felt  that  Sir 
Francis  would  give  practical  consideration  to  our  rejjresentations.  And 
so  it  proved. 

Soon  after  he  assumed  office  he  determined  to  come  up  to  Toronto  to 
consult  the  Western  bankers  and  the  supporters  of  the  Government  on 
the  subject.  It  so  happened  that  I  was  on  the  platform  of  the  Grand 
Trunk  Railway  station  when  he  arrived,  being  about  to  visit  one  of  our 
branches.  Some  political  friends  had  come  to  meet  him,  one  of  whom 
was  that  member  of  the  House  of  Commons  who  had  so  warmly  espoused 
our  cause.  He  introduced  me  to  Sir  Francis,  and  informed  him  that  I 
could  give  him  full  information  respecting  the  controversy,  as  Western 
bankers  viewed  it.  We  talked  for  some  time,  he  manifesting  great  inter- 
(:St,  and  evidently  taking  in  the  position  as  presented  to  him.  He  then 
went  into  the  city  to  see  other  bankers,  some  of  them  old  political  friends, 
and  with  whom  he  had  further  conferences.  He  remained  a  day  or  two 
in  the  West,  and  on  leaving  for  Ottawa  promised  to  give  careful  attention 
to  the  representations  M-e  had  made. 

He  had,  of  course,  heard  the  other  side  from  members  of  the  Ciovern- 
ment,  and  from  the  Bank  of  Montreal.  But  it  was  soon  made  evident 
that  he  would  think  the  matter  out  for  himself,  and  take  his  own  course, 
no  matter  what  names  were  quoted  to  influence  him.  I  have  no  doubt 
lifter  leaving  Toronto  he  also  saw  bankers  from  Quebec  and  the  Maritime 
Provinces.  Some  time  now  elapsed  and  the  jjeriod  was  one  of  alternate 
hopes  and  fears.  But  at  last  we  were  sununoned  to  meet  him  in  Ottawa. 
A  full  representation  from  the  West,  the  East,  and  the  Maritime  Prov- 
inces gathered  in  the  capital,  and  to  this  conference  Sir  Francis  an- 
nounced the  conclusions  he  had  arrived  at.  These  in  substance  were  as 
follows : 


364  BANKING    AND    COMMERCE. 

New  Law  Rksi-kctixg  Cip.cui..\tion. 

(1)  Tliat  the  banks  should  retain  their  circulation,  with  the  exception 
of  the  notes  of  one  and  two  dollars.  These  to  be  issued  by  the  Govern- 
ment. 

(2)  The  banks  to  be  under  no  obliiiation  to  cover  their  circulation 
by  Government  securities.     But  not  to  issue  bej'ond  their  paid-up  capital. 

(3)  An  Act  to  be  passed  creating  an  issue  of  Government  legal- 
tender  notes  for  the  purpose  of  settlement  between  banks.  The  cash  re- 
serves of  the  banks  at  all  times  to  consist  partly  of  such  notes;  say,  to 
the  extent  of  two-fifths  of  the  whole,  whatever  such  reserves  might  be 
from  time  to  time.  For  those  legal-tender  notes  gold  to  be  held  by  the 
Government  to  an  extent  to  be  agreed  upon.  The  balance  to  be  covered 
by  Government  securities  held  in  the  Treasury,  of  which  ten  pe*r  cent, 
would  be  guaranteed  by  the  Imperial  Government.  Thus  all  ordinary 
issues  would  be  covered  either  by  gold  or  Government  securities.  Beyond 
this  amount  all  Government  notes  to  be  secured  by  gold  actually  held. 

Some  other  provisions  for  security  were  added,  most  of  which  had 
been  suggested  by  ourselves,  but  the  foregoing  were  the  fundamental 
features  of  his  scheme. 

It  will  be  perceived  at  once  that  this  conceded  practically  all  we  had 
contended  for.  The  surrendering  of  one  and  two  dollar  notes  amounted 
to  nothing.  We  were  not  sorry  to  get  rid  of  them,  for  in  the  "runs"  that 
some  of  us  had  jiassed  through,  the  bulk  of  the  people  that  crowded 
round  our  counters  had  presented  only  this  class  of  notes. 

The  obligation  to  hold  forty  per  cent,  of  our  cash  reserve  in  Govern- 
ment notes,  was  somewhat  distasteful,  for  we  had  always  held  our  whole 
cash  res(;rve  in  gold;  and  some  feared  that  its  adoption  might  disturb  the 
solid  basis  on  which  our  currency  and  financial  system  rested.  But,  after 
all,  the  proposal  could  be  adopted  without  practical  inconvenience  or 
danger,  for  the  notes  themselves  rested  on  gold  and  securities  readily 
convertible  into  gold.  And  the  issues  of  the  Government,  apart  from  the 
small  notes,  would  not  enter  into  circulation  at  all,  being  all  of  large 
denominations. 

It  was  an  immense  relief  to  us  when  the  Finance  Minister  announced 
these  conclusions,  and  when  we  met  to  consider  them  there  was  not  a  dis- 
sentient voice.  Wc  felt  it  to  be  reasonable  that  some  concessions  should 
be  made  after  the  main  issue  had  been  agreed  to,  and  all  declared  their 
jcadiness  to  hold  the  large  amount  of  Government  notes  proposed,  if  the 
gold  basis  were  made  sufficiently  strong.  Sir  Francis  willingly  agreed  to 
this,  and  great  satisfaction  was  expressed  at  the  haj)))y  result  of  so  long 
and  severe  a  contest. 

It  now  only  remained  to  embody  these  conclusions  in  legislation.  And 
here  we  come  to  the  origin  of  "Tlie  Canadian  Banking  Act." 

With  regard  to  the  proposed  issue  of  Government  notes,  it  was  com- 
])arative]y  easy  to  frame  an  Act  embracing  the  points  agreed  upon.    This 


NEGOTIATIONS    RESPECTING   CIRCULATION.  36'; 

Tvas  done,  and  it  exists  to-day  as  the  Dominion  Note  Act,  having  re- 
mained substantially  as  at  first,  with  the  exception  of  the  enlargement  of 
its  provisions  to  meet  the  expansion  of  the  business  of  the  coantry. 

But  it  was  not  so  easy  to  deal  with  the  charters  of  the  banks,  inas- 
much as  each  of  them  at  that  time  was  in  the  shape  of  a  separate  act  of 
Parliament.  In  their  main  provisions  most  of  the  charters  were  alike. 
But  in  several  cases  the  constitution  and  privileges  of  the  bank  were  on  a 
different  basis  from  the  rest.  These  acts  had  been  passed  at  different 
periods,  and  contained  a  number  of  minor  provisions  differing  from  one 
another.  It  was  felt,  however,  to  be  undesirable  that  the  banking  of 
Canada  should  be  continued  under  separate  acts  of  Parliament,  and  that 
an  effort  should  be  made  to  frame  one  general  act,  embodying  the  most 
important  provisions  of  them  all,  together  with  those  that  had  recently 
been  agreed  to  by  the  Government.  The  best  legal  minds  in  Parliament 
were  then  convened,  in  conjunction  with  the  P'inance  JSIinister,  to  frame 
a  general  act.  The  Hon.  Edward  Blake  took  a  prominent  part  in  this, 
and  some  of  the  new  clauses  were  drawn  by  him.  All  who  had  been  active 
in  the  late  controversy  were  invited  to  meet  in  Ottawa  once  more,  and 
give  these  gentlemen  the  benefit  of  their  suggestions.  The  committee 
had  in  addition  the  very  valuable  co-operation  of  the  General  Manager  of 
the  Bank  of  Montreal;  for  now  that  the  great  points  of  difference  had 
been  settled,  the  interests  of  all  the  banks  were  alike.  Representatives  of 
banks  from  all  parts  of  the  country,  therefore,  sat  in  conference  day  by 
day,  discussing  the  clauses  of  the  proposed  act  one  by  one;  and  none 
rendered  more  valuable  service  than  our  late  formidable  antagonist,  who 
sat  with  us  the  whole  time,  and  brought  to  bear  u})on  the  matter  all  those 
qualities  of  sound  judgment  and  keen  perception  which  distinguished 
him.  We  sat  in  one  of  the  committee  rooms  of  the  House,  and  discussed 
the  bill  with  a  considerable  sense  of  responsibility,  being  well  aware  not 
only  that  our  conclusions  would  affect  the  whole  banking  interests  of  the 
country,  but  every  other  interest,  commercial,  manufacturing,  and  in- 
dustrial, not  to  speak  of  the  interests  of  the  Government  itself. 

Many  of  the  directors  of  the  banks  and  several  of  their  presidents 
were  Members  of  Parliament;  some  in  the  Senate,  some  in  the  House  of 
Connnons.  Tiiese,  of  course,  sat  with  us  from  time  to  time,  so  that, 
though  not  formally  constituted  as  such,  m'c  really  were,  in  effect,  a  joint 
committee  of  Parliament  and  of  bankers. 

I  have  always  considered  that  this  gave  our  Banking  Act  its  peculiar 
value,  in  that  it  expressed  the  matured  judgment,  sharpened  by  ex- 
perience, of  the  foremost  men  in  banking,  commercial,  and  political  life. 
After  all  this  preliminary  work,  in  which  members  of  both  political  par- 
ties joined,  it  may  be  imagined  that  the  bill  passed  through  Parliament 
with  little  criticism  and  no  opposition. 

It  bears  marks  to  this  day  of  being  an  amalgam.iting  act,  with  ex- 
ceptions here  and  there,  in  minor  features,  but  bringing  every  b  .nk  io 
the  couutrv  under  the  same  general  law  in  regard  to  essentials. 


366  BANKING    AND    COMMERCE. 

The  duration  of  the  act  was  for  ten  years,  and  it  has  been  the  sub- 
ject of  careful  consideration  and  discussion  at  every  decennial  period 
since  18?]..  It  has  been  amended  and  improved  in  important  particulars 
after  passing,  however,  through  the  same  process  that  it  passed  through 
at  first,  viz.;  long  conferences  between  the  Finance  Minister,  or  his 
Deputy,  and  bankers. 

Safety  of  Baxk  Notes  Furtheh  Assuueo. 

By  far  the  most  important  of  these  amendments  >vas  that  which  pro- 
vides for  bank  notes  to  be  a  First  Charge  on  all  the  assets  of  a  bank, 
and  as  subsidiary  to  that,  the  foundation  of  a  Redemption  Fund,  the  far- 
reaching  effect  of  which  has  been  opened  up  elsewhere.  Both  these  were 
proposed  by  the  bankers  themselves;  the  first  in  response  to  a  renewed 
proposal  to  revive  the  act  compelling  a  covering  by  Government  secur- 
ities. That,  however,  av3s  not  a  serious  effort,  and  the  Minister  readily 
gave  way  to  our  proposed  substitute  of  a  first  charge. 

I  have  thus  described  in  detail  the  various  steps  of  the  process  by 
which  Canada  came  to  possess  a  general  Banking  Act,  which  has  proved 
itself  satisfactory  in  the  highest  degree  in  its  practical  working,  and 
under  which  a  system  of  bank  circulation  has  been  established  which 
combines  in  an  eminent  degree  the  qualities  of  safety,  elasticity  and 
adaptability  to  the  varying  requirements  of  commerce,  and  by  the  opera- 
tion of  which  the  financial  affairs  of  the  country  have  been  preserved  on 
a  more  stable  equilibrium  than  in  any  other  part  of  this  continent,  and 
perhaps  of  the  world. 


CHAPTER   VI. 

MY  EXPERIENCE  AS  GENERAL  MANAGER  IN  MONTREAL, 

INCLUDING  REFERENCES  TO  BUSINESS  IN  NEW 

YORK,  CHICAGO,  MILWAUKEE,  AND  TO 

THE  BARING  CRISIS. 

Enlarged  Responsibilities — Shaueiiolders'  Annual  Meeting — Bank 
Failures  in  Montreal — Oun  Business  in  New  York — Journey 
TO  THE  South — Silver  Agitation — Visits  to  Commercial  Cen- 
ters in  England — The  Baring  Crisis — Chicago  and  Minneap- 
olis— Visit  to  Manitoba — The  Manitoba  Boom — The  Bankers' 
Association — Renewal  of  Bank  Charters  and  the  Securing  of 
Circulation  by  a  First  Lien  on  Assets — Final  Retirement  from 
Banking. 

AFTER   I    left  tlie    Bank   of  Toronto,      I   still   continncd   to   keep   in 
L      touch  with  banking  and  financial  movcnionts.     It  was  agreed  that 
I  should  do  so  for  about  twelve  months  after  my  retirement,  and 
give  the  bank  the  benefit  of  any  information  at  my  command.     Moreover, 
I  still  continued  to  write  for  the  press  on  financial  subjects.    This  was  in 
January,  1877. 

The  times  had  now  been  bad  for  nrarly  three  years.  They  continued 
to  be  bad.  Business  was  difficult,  and  failures  increasingly  numerous.  It 
was  known  in  banking  circles  that  one  of  the  leading  banks  of  the 
country,  the  Merchants'  Bank  of  Canada,  was  meeting  with  severe 
losses;  and  in  such  times  as  were  then  passing  over  us,  it  was  with  no 
surprise  that  the  public  learned  that  an  uneasy  feeling  was  developing 
amongst  the  stockholders  and  creditors  of  the  bank.  In  these  circum- 
stances a  movement  was  made  by  a  number  of  stockholders  looking  to  the 
retirement  of  the  president  and  general  manager,  which  finally  resulted 
in  the  resignation  of  both.  A  new  president  and  vice-president  were  at 
once  elected.     But  the  office  of  general  manager  was  vacant. 

P^nlarged  Responsibilities. 

It  was  about  the  middle  of  February,  only  six  weeks  after  I  had,  as 
I  thought,  bade  farewell  to  banking  for  life,  that  it  was  intimated  to  me, 
by  a  banking  friend,  that  the  directors  of  the  Merchants'  Bank  were 
thinking  of  offering  the  position  of  general  manager  to  me.  I  smiled, 
and  said  the  rumor  was  absurd.    I  had  given  up  banking  and  was  "out  of 


36S  BANKING    AND    COMMERCE. 

the  running."  However,  he  persisted  tliat  lie  liad  the  information  from 
a  reliable  source.  This  proved  correct;  for  in  the  course  of  a  day  or 
two,  during  which  I  had  been  able  to  think  over  the  matter,  a  gentleman 
from  Montreal  waited  upon  me  to  ask  whether  it  would  be  possible  for 
me  to  take  charge  of  the  Merchants'  Bank,  in  the  present  emergency,  I 
asked  him  at  once  whether  he  represented  the  directors.  He  assured  me 
that  he  did.  He  added  that  he  was  authorized  to  say  that  in  the  event 
of  my  giving  consent,  everything  in  the  way  of  support  and  assistance 
from  the  board  would  be  rendered  me;  that  the  late  president  was  still 
retained  as  director;  that  he  could  give  me  all  necessary  information 
about  the  affairs  of  the  bank.  (This  was  the  late  Sir  Hugh  Allan,  whom 
I  knew  well.  Of  his  high  position  I  need  not  speak.)  The  late  general 
manager,  he  added,  was  still  in  charge,  and  would  render  every  assist- 
ance. 

The  responsibility  of  taking  charge  of  a  bank,  under  the  circum- 
stances, was  a  serious  one,  for  two  reasons.  It  had  been  attempted  once 
l>efore  in  the  case  of  the  Bank  of  Upper  Canada,  but  the  attempt  had 
entirely  failed;  yet  the  gentleman  who  undertook  the  task  was  of  much 
greater  experience  and  much  higher  banking  position  than  I  could  pre- 
tend to;  besides  this,  the  times  were  very  difficult;  there  had  been 
three  years  of  depression,  and  it  was  feared  there  would  be  more,  a  fore- 
cast which  jjroved  onl}-  too  true,  for  the  succeeding  years  were  worse 
than  those  that  had  gone  before.  Insolvencies  were  increasing  year  by 
year,  and  a  settled  gloom  was  prevailing  in  the  commercial  community, 
so  that,  instead  of  the  usual  query  on  'Change,  and  at  the  clubs,  "How 
is  business.''"  the  question  was,  "Who  is  going  to  fail  next.''"  In  the  im- 
porting trade,  bad  debts  were  swallowing  up  all  the  profits  and  more. 
There  was  no  profit  in  manufacturing,  but  very  much  the  reverse.  The 
great  lumber  and  timber  interest  was  in  one  of  the  deepest  sloughs  of  de- 
pression into  which  it  has  ever  been  plunged. 

Such  was  the  condition  of  things  when  I  was  asked  to  assume  charge 
of  the  ^Merchants'  Bank.  I  knew  something  of  this,  from  my  experience 
in  Toronto,  but  I  did  not  knew  all.  If  I  had,  it  is  doubtful  whether  I 
would  !iave  had  the  courage  to  undertake  the  heavy  task  of  rescuing  the 
bank  from  its  difficulties  and  jjlacing  it  on  a  sound  footing.  There  was, 
however,  one  great  dift'erence  between  the  case  of  the  Bank  of  Upper  Can- 
ada and  this,  viz. :  in  the  composition  of  the  board.  The  board  of  the 
former  bank  I  have  characterized  already.  That  of  the  Merchants' 
Bank  was  a  complete  contrast  to  it  in  every  respect,  consisting  as  it  did 
of  some  of  the  wealthiest  and  most  experienced  business  men  of  the  com- 
munity. Yet,  able  and  important  as  they  Avere,  they  were  willing  to  give 
me  a  perfectly  free  hand  in  the  work  of  reorganization,  and  to  co-operate 
in  any  suggestions  I  made  for  improvement. 

The  two  leading  banks  had  ottered  to  render  assistance,  and  very 
politic  it  was  in  them  so  to  do;  for  if  the  Merchants'  Bank,  with  its 
multifarious    Inisiness    and    branches    sjiread    all    over    Canada,    and    its 


AS    GENERAL    MANACIF.R    IN    MONTH [•AL.  360 

agencies  in  New  York  and  London,  had  stopjicd  payment,  it  is  certain 
that  a  condition  of  panic  would  have  superseded,  such  as  to  shake  the 
credit  of  the  country  to  its  foundations.  Their  willingness  to  aid  saved 
Canada  from  this  disaster.  They  agreed  at  once  to  advance  the  sum  I 
named  as  necessary;  and  a  very  large  sum  it  was.  But  the  security  was 
unquestionable. 

The  board  and  the  managers  co-operated  heartily  in  the  work  of 
reconstruction ;  but  the  task  jiroved  far  more  difficult  than  I  could  have 
anticipated.  Not  only  were  there  masses  of  Canadian  accounts  to  deal 
with,  of  the  same  kind  that  1  had  had  to  deal  witli  before,  but  on  a 
more  extended  scale;  there  were  in  addition  immense  operations 
being  carried  on  in  New  York  and  London,  of  a  different  kind  alto- 
gether. 

The  former  I  cut  short  at  once,  se\ere  as  the  loss  was,  and  it  was 
well  I  did;  for  had  the  operations  been  let  alone,  the  loss  would  have 
doubled,  ^^'ith  regard  to  the  latter,  I  accepted  a  favorable  projiosal 
made  by  the  General  Manager  of  the  Bank  of  ^Montreal,  whom  I  had 
consulted  on  the  subject.  There  was  going  on  at  this  time,  indeed,  what 
seemed  like  a  certain  amount  of  cargo  being  thrown  overboard  to  save 
the  ship.  But  save  the  ship  we  did,  and  steered  her  at  last  out  of  the 
stormy  waters  in  a  sound  condition,  atid  well  found  in  every  respect,  by 
the  blessing  of  God.  And  so  she  has  continued  ever  since;  and  I  don't 
think  what  was  thrown  overboard  was  of  any  permanent  value;  indeed,. 
I  told  the  stockholders  afterwards,  that  during  this  terrible  period, 
though  we  had  to  wade  through  and  settle  up  masses  of  insolvencies,  we 
had  not  lost  a  single  valuable  account.  But  with  me,  it  was  night  and 
da}^  work  for  more  than  three  years;  and  my  banking  hours,  during  this 
period,  might  be  said  to  have  been  from  nine  in  the  morning  till  eleven 
at  night. 

Annual  ^Meeting. 

The  time  came  at  length  for  holding  the  annual  meeting,  and  a  very 
important  occasion  it  was.  It  was  not  without  apprehension  that  we 
bad  looked  forward  to  il.  for  it  had  begun  to  be  rumored  in  the  city  that 
an  attempt  would  be  made  to  hold  some  of  the  directors  personally  re- 
sponsible for  the  losses.  The  meeting  therefore  needed  to  be  very  care- 
fully handled.  As  the  report  of  the  directors  was  read,  and  it  was 
stated  that  a  reduction  of  capital  of  more  than  two  millions  would  be 
necessary,  a  condition  of  suppressed  excitement  arose  in  the  meeting. 
I  was  aware  that  explanations  would  be  asked  from  myself,  and  had 
considered  carefully  what  remarks  to  make.  The  directors,  I  was  con- 
vinced, were  not  so  much  to  blame  as  was  generally  supjiosed.  I  there- 
fore began  by  reminding  the  stockholders  that  tlie  directors  were  very 
heavy  holders  of  the  stock;  that  none  were  so  interested  in  the  welfare 
of  the  bank  as  they  were;  that  they  would  be  the  heaviest  suflerers  by 
the  reduction;  that  the  times  had  been  very  difficult  for  several  years; 

24 


370  BANKING    AND    COMMERCE. 

that  all  banks  had  surt'cred  losses;  that  if  the  directors  had  made  mis- 
takes, they  had  acknowledged  them,  and  agreed  readily  to  my  sugges- 
tions for  improvement;  that  the  wise  and  practical  course  for  them  as 
men  of  business  was  to  make  the  best  of  the  situation,  just  as  men  had 
to  do  at  times  in  conducting  their  own  business.  I  told  them  that  the 
bank  had  a  large  amount  of  good  business  left,  and  six  millions  of  cap- 
ital, after  reduction;  that  upon  this  new  foundation  a  good  future  might 
be  developed;  and  that  if  the  reduction  of  the  capital  were  carried  out, 
there  could  be  little  doubt  that  steady  dividends  could  be  paid  in  future. 
What  the  dividends  would  be  would  depend  upon  the  general  course  of 
affairs  in  the  country,  but  that  the  bank  had  considerable  earning  capacity 
tliere  could  be  no  doubt. 

My  object,  as  will  be  seen,  was  to  jDour  oil  on  the  troubled  waters, 
and  to  turn  the  thoughts  of  malcontents  into  another  channel  from  what 
they  had  been  dwelling  upon. 

The  vice-president  made  some  very  pertinent  remarks,  much  to  the 
same  purpose. 

It  was  no  object  of  mine  to  cast  blame  on  officials;  but  this  I  had  to 
do  to  some  extent,  but  cautiously  and  guardedly.  When  I  sat  down  one 
or  two  of  the  stockholders  asked  questions,  evidently  prepared  before- 
hand, as  to  the  responsibility  of  the  directors,  and  what  was  to  be  done 
in  view  of  it.  I  had,  however,  no  difficulty  in  answering  them  so  as  to 
prevent  that  kind  of  remark  being  carried  further.  The  late  president, 
with  his  usual  sagacity,  sat  perfectly  silent  during  the  meeting,  though 
most  of  the  criticism  was  directed  against  him.  A  few  other  questions 
were  asked,  one  of  the  most  important  being  by  Mr.  Donald  Smith  of 
the  Hudson  Baj'^  Company,  now  Lord  Strathcona.  This  I  was  able  to 
answer  to  his  satisfaction.  The  meeting  finally  ended  in  the  adoption  of 
a  reconnnendation  to  ask  Parliamentary  sanction  to  a  reduction  of  twenty- 
five  per  cent,  on  the  capital.  And  the  directors  were  unanimously  re- 
elected. 

So  ended  this  very  important  meeting. 

The  annual  meeting  settled  things  somewhat,  and  I  soon  afterwards 
had  the  satisfaction  of  repaying  to  the  banks  all  we  had  borrowed  from 
them,  still,  however,  keeping  good  reserves.  We  were  also  realizing  divi- 
dends from  insolvent  estates,  and  the  proceeds  of  properties  we  were 
bringing  to  sale  from  month  to  month.  And  as  one  knotty'  point  after 
another  was  settled,  and  one  wave  of  difficulty  after  another  was  sur- 
mounted, I  became  more  and  more  hopeful  of  the  ultimate  issue.  But 
unexpected  developments  occasionally  tried  my  patience  almost  beyond 
endurance. 

We  still,  however,  had  one  more  ordeal  to  jjass  through,  namely,  to 
get  a  bill  through  Parlia)nent  authorizing  tlie  reduction  of  stock. 

Application  to  Parliament. 

The  first  year  l>ad  passed  away.  We  were  making  a  fair  profit  out 
of  our  good  business,  but  could  distribute   nothing  until  the  capital  was 


AS    GENERAL    >E\NA(iEH    IN    MONTH  KAI..  371 

adjusted  oil  n  now  ba^is.  But  tlio  times  were  iricnasiu^ly  difficult.  l)r- 
pression  became  deeper  and  deejier,  and  by  tbc  time  that  Parliament 
opened,  and  we  had  to  make  our  a))plication,  it  became  evident  that  the 
reduction  would  need  to  be  larger  than  the  stockholders  had  voted  for. 
I  was  certain  of  this,  owing  to  the  number  of  new  failures  that  had  trans- 
pired and  tlie  uusitisfaetory  result  of  many  insolvent  estates.  It  was 
therefore  witli  a  luavy  heart  I  proceeded  once  more  to  Ottawa  and 
traversed  the  familiar  halls  and  corridors  of  former  years. 

The  able  and  experienced  Solicitor  of  the  Bank,  the  Hon.  John 
Abbott,  accompanied  me;  perhaps  it  might  be  put  that  I  accomj)anied 
him;  for  of  course,  as  our  Advocate,  he  would  have  the  task  of  present- 
ing the  case  to  the  Banking  and  Commerce  Committee  of  Parliament. 
He  was  a  member  of  I'arliamcnt  himself,  and  some  years  after  became 
Prime  Minister. 

The  Finance  MiniNter  of  that  time  had  somewhat  of  a  rei)utation  for 
impressing  upon  deputations  that  he  knew  their  att'airs  better  than  they 
did  themselves.  In  some  cases  this  might  be  true.  This  disposition  of 
mind  on  his  part,  however,  was  of  very  great  service  in  our  interviews 
with  him.  I  Mas  convinced,  and  had  so  informed  the  board  and  Mr. 
Abbott,  that  unless  we  got  the  capital  reduced  by  thirty-three  per  cent., 
instead  of  twenty-five,  it  would  be  difficult  to  carry  on  business  satis- 
factorily. The  difference  would  be  some  $700,000;  and  we  needed  it  all, 
if  we  were  to  start  on  our  new  career  with  any  sort  of  a  reserve  fund. 
But  it  was  difficult  to  express  this  to  the  Parliamentary  Committee,  for 
our  mandate  from  the  stockholders  was  to  ask  for  a  reduction  of  only 
twenty-five.  But  to  my  surprise  and  great  satisfaction  the  Finance 
Minister  himself  began  to  suggest  doubts  whether  a  reduction  of  twenty- 
five  per  cent,  would  be  sufficient.  This  was  exactly  the  line  we  wanted 
him  to  take,  though  we  did  not  give  him  to  understand  it  in  so  many 
words.  He  had  formerly  been  a  director  of  the  Commercial  Bank,  whose 
business  we  had  purchased,  and  knew  very  well  what  the  purchase  of 
that  business  had  involved.  And  he  was  well  aware  of  the  depression  of 
business  that  prevailed  in  the  country.  The  discussion  was  joined  in  by 
another  member  of  the  Cabinet,  a  very  influential  Montreal  gentleman, 
M'ho  said  that  he  had  also  about  made  up  his  mind  that  a  greater  reduc- 
tion than  twenty-five  per  cent,  would  be  necessary.  In  fact,  he  thought 
it  would  be  better  to  make  the  red\iction  thirty-three  i)er  cent.  This  was 
an  immense  relief.  I  doubt  much  whether  we  could  have  secured  such  a 
reduction  if  we  had  pressed  for  it  ourselves,  but  when  the  Finance  Min- 
ister announced  this  as  a  decision,  it  was  accepted  with  a  satisfaction  I 
did  not  care  to  show.  On  this  basis  then  a  bill  was  brought  into  Parlia- 
ment. There  was  no  opposition.  The  bill  passed  without  difficulty,  and 
received  the  Royal  assent. 

Wlien  this  bill  was  passed  I  ft  It  that,  at  last,  we  had  got  down  to  a 
solid  basis.  The  credit  of  the  bank  was  restored,  we  had  a  good  circle  of 
\aluable    customers    and    numerous    paying    branches.      Our   officers   were 


372  BANKING    AND    COMMERCE. 

coming  to  understand  their  duties  under  tlie  new  regime,  our  machinery 
for  dealing  witli  irsolvent  estates  was  well  organized,  and  although  it 
was  more  than  three  ye.TS  before  we  were  fairly  "out  of  the  woods,"  I 
felt  more  and  more  confident  that  we  could  hold  our  own  against  any 
storm  that  might  rise,  give  satisfaction  to  our  customers,  pa}'  respectable 
dividends  to  our  stockholders,  and  gradually  accumulate  a  rest,  which 
vve  hoped  in  time  miglit  amount  to  fifty  })er  cent,  of  the  capital. 

Bank  Failurfs  ix  ISIontreal. 

About  the  end  of  this  long  jieriod  of  depression  signs  of  weakness 
began  to  be  exhibited  by  several  small  banks.  These  banks  had  no 
branches,  their  business  being  entirely  local.  Their  methods  of  manage- 
ment had  never  inspired  confidence.  The  manager  of  one  of  them  was  of 
rather  a  boastful  temperament,  and  amongst  his  friends  was  accustomed 
to  say  that  the  banks  of  the  city  generally  were  old-fashioned  in  their 
ways,  and  their  modes  of  doing  business  not  suitable  to  the  times.  We 
rather  smiled  at  all  this,  knowing  well  that  banking  M'as  a  business 
founded  on  settled  principles,  demonstrated  by  long  experience  to  be  un- 
susceptible of  change  from  changing  times.  We  quite  expected  that  some 
day  or  other  this  bank  would  get  into  difficulties,  and  apply  for  assist- 
ance. And  so  it  happened.  The  Merchants'  Bank  took  part  in  con- 
nection with  some  of  the  older  banks  in  rendering  them  assistance,  taking 
such  security  as  the  bank  was  able  to  offer  us.  This,  however,  only  put 
off  the  evil  day,  and  at  length  the  bank  stopped  payment,  and  was  wound 
up.  All  these  banks  had  corducted  their  business  in  a  sanguine  and  reck- 
less manner,  in  defiance  of  the  precautions  which  experience  has  rendered 
necessary  to  safety.  Their  failure,  however,  only  intensified  the  gloom 
which  invaded  financial  and  business  circles,  a  gloom  which  had  continued 
(1879)  for  nearly  seven  years;  and  whispers  began  to  be  about  respect- 
ing the  position  of  other  banks.  Slight  symptoms  of  a  run  were  mani- 
fested in  some  quarters.  I  had  fully  anticipated  this,  and  strengthened 
our  cash  reserves,  so  that  if  a  drain  did  set  in  we  could  meet  it  without 
difficulty.  However,  notliing  of  the  kind  took  place,  nor  was  there  any 
serious  demand  made  upon  the  otlier  banks.  Yet,  I  did  feel  the  con- 
linuous  wearing  anxiety  of  the  unprecedented  number  of  commercial 
failures  that  were  transpiring  (more  than  four  times  as  many  as  they 
were  a  year  or  two  afterwards),  and  longed  for  the  time  when  the 
clouds  would  break. ^- 


12  How  deep  the  depres.sion  of  this  period  was  may  be  gathered  from  tlie 
fact  that  Bank  of  Montreal  stock  had  fillon  from  2i';  in  1S72  to  125  in  1S79. 
Bank  of  Commerce  from  122  in  1877  to  95  in  1S79.  Bank  of  Toronto  from  176  in 
1877  to  106  in  1879.  The  Canadian  Pacific  Railroad,  now  in  such  a  magnificent 
financial  position,  was  then  in  such  straits  that  after  borrowing  all  it  could 
from  its  bankers  it  was  obliged  to  pay  for  supplies  by  promissory  notes,  which 
notes  were  hawked  about  the  street,  at  a  heivy  discount.  I  never  lost  faith  in 
this   enterprise,   and   discounted  all   its  paper   thai   was  offered. 


AS   GENERAL    .MANACiKK    IX    MONTREAL.  373 

Our  BrsiNEss   ix   Nkw   Youk. 

During  tlie  period  of  reorganization,  and  lut'orr  we  liad  got  the  act 
of  Parliament  to  reduce  the  capital,  it  was  useless  to  attempt  to  do  much 
business  in  New  York.  We  !iad  no  spare  money  to  lend  on  stocks,  and 
our  commercial  credits  were  not  looked  on  with  favor.  Neither  could  we 
draw  further  on  our  London  office,  which  was  about  to  be  closed. 

We  therefore  retired  into  a  sort  of  obscurity  for  a  time,  and  made 
an  arrangement  with  a  private  banking  firm  to  occupy  a  part  of  their 
spacious  office,  and  to  do  a  Sterling  business,  under  their  wing.  We  did 
not  expect  to  do  more  than  pay  expenses  under  this  arrangement,  but  it 
enabled  us  to  keep  our  hold  upon  New  York.  It  would  keep  our  officers 
in  touch  with  the  market,  and  in  iiractice.  We  therefore  gave  up  our  own 
office  in  Wall  Street  (saving  a  heavy  bill  of  expense  thereby),  and 
entered  on. the  new  arrangement  on  a  very  economical  scale. 

This  continued  for  a  year.  We  did  a  quiet,  safe  business,  having  the 
advantage  of  the  excellent  judgment  of  one  of  the  partners  of  the  firm 
in  the  critical  business  of  buying  bills.  We  made  no  bad  debts,  and  lost 
nothing,  somewhat  of  a  contrast  to  our  former  Wall  Street  experience. 
But  on  the  other  hand  we  viade  nothing. 

Our  relations  with  the  firm  were  always  satisfactory;  but  at  the  end  of 
a  year  our  managers  thought  we  might  make  the  experiment  of  opening 
an  office  of  our  own.  Our  credit  had  gradually  become  re-established, 
and  we  were  beginning  to  have  once  more  some  disposable  funds. 

I  therefore  recommended  opening.  The  board  coincided.  We  rented 
a  very  unpretentious  office  in  Exchange  Place,  at  a  very  moderate  rent, 
and  commenced  business  on  the  new  foundation.  And  as  we  had  an  un- 
impaired capital  of  six  millions,  with  the  nucleus  of  a  rest  in  addition, 
we  considered  that  we  had  a  fair  chance  of  success. 

W'c  soon  found  that  we  could  sell  our  sterling  bills  at  fair  rates, 
drawn  as  they  were  on  a  Scotch  bank  of  undoubted  strength.  We  pro- 
ceeded very  cautiously  in  the  matter  of  issuing  commercial  credits,  how- 
ever, for  the  business  has  risks  ])eculiar  to  itself.  Before  long  we  were 
able  to  spare  funds  for  loaning  on  stocks.  Thus  between  the  sterling 
business  and  the  interest  on  our  stock  loans,  we  did  a  fairly  profitable 
business  in  the  first  year.  At  the  time  of  the  boom  in  Winnipeg,  as  will 
be  seen  later  on,  we  had  enormous  deposits  at  that  branch.  It  would 
have  been  madness  to  employ  them  in  discounting,  and  not  ]irudent  at  that 
time  to  place  them  out  in  stock  loans  in  Canada.  We  therefore  transferred 
almost  the  whole  amount  to  New  York,  and  placed  it  out  on  call  loans 
there.  Our  New  York  business  now  assumed  respectable  proportions. 
The  brokers  included  us  in  their  daily  round  of  calls,  and  we  took  our 
place  once  more  amongst  the  Canadian  banking  institutions  which  have 
played  such  a  prominent  part  in  Wall  Street  for  the  last  generation.  In 
the  second  year  we  made  very  considerable  profits.  But  a  cloud  was  still 
hanging  over  the  commercial  position.      Stocks   were  heavily   dejjressed. 


374  BANKING    AND    COMMERCE. 

Much  business  in  the  United  States  was  carried  on  without  jjrofit.  But 
Wall  Street  was  free  from  spasms,  our  customers  were  amongst  the  best 
of  the  city  brokers,  and  every  one  that  knows  New  York  knows  what  a 
highly  respectable  class  of  men,  as  a  rule,  they  are.  (I  stay  my  hand 
jiere,  for  a  moment,  to  say  that  of  the  hundreds  of  millions  of  money  we 
loaned  to  brokers  in  New  York  during  the  twenty-five  years  of  my  ad- 
ministration, we  never  lost  a  dollar.  We  did  lose,  however,  once,  by 
dealing  with  principals.) 

As  time  went  on,  our  managers  came  to  have  a  more  intimate  acquaint- 
ance with  the  range  of  stock  and  bond  securities,  and  as  one  of  them 
had  been  brought  up  in  New  York,  we  came  to  feel  more  confidence  at 
headquarters  in  their  judgment.  We  still,  however,  had  to  test  by  ex- 
perience, what  the  effect  of  a  shai-p  break  in  stocks  might  be.  It  came  at 
length,  and  to  ray  great  satisfaction  we  passed  through  it  safely.  Some 
premonitory  symptoms  had  appeared,  and  caused  us  uneasiness  in  ISIont- 
jeal.  On  t)ic  day  when  the  heavy  all-round  break  took  place,  we  had 
advices  as  the  day  Ment  on;  and  at  the  close,  I  took  the  night  train  for 
New  York,  to  scan  the  position  for  myself.  To  my  great  satisfaction, 
on  entering  our  office  early  next  morning,  I  found  our  managers  per- 
fectly comfortable  and  satisfied.  The  brokers  had  responded  bravely  to 
our  calls  for  margin.  We  never  called  for  pai/ment  in  a  single  instance, 
nor  were  we  ever  near  the  point  of  considering  whether  a  stock  should  be 
sold  out.  Matters  quieted  down  in  a  day  or  two,  and  this  experience  gave 
us  great  confidence  in  lending  money  on  stocks  in  New  York. 

And  this  has  been  our  experience  on  every  occasion  of  a  similar  kind 
since  then.  Our  customers  amongst  the  brokers  have  never  failed  us. 
We  have  passed  through  several  crises,  when  the  whole  market  went  down 
an  average  of  twenty-five  per  cent.;  some  stocks,  of  course,  falling  far 
more.  Yet,  at  the  close  of  the  day,  our  loans  were  as  well  margined  as 
before. 

But  on  occasions,  we  have  been  approached  by  principals,  with  pro- 
posals for  time  loans,  and  by  one  of  these,  Ave  made  a  considerable  loss. 
The  loan  was  desired  by  a  man  in  good  commercial  standing,  on  a  stock 
quoted  above  par.  The  margin  offered  was  ample,  larger  than  usual,  as 
the  loan  was  to  be  on  time.  But  this  lending  on  time  to  a  principal 
proved  a  great  mistake.  The  party  proved  to  be  the  promoter  of  the  en- 
terprise, and  the  largest  owner  of  the  stock. 

It  had  formidable  competitors,  and  the  stock,  while  in  our  hands, 
began  to  fall.  We  called  for  more  margin,  a)id  for  a  time  he  responded. 
The  price  still  fell,  and  our  call  was  repeated.  But  this  time  he  failed  to 
rc&])ond.  The  stock  went  down  until  it  reached  so  low  a  figure  that  the 
promoter  was  ruined,  the  enterprise  absorbed  by  its  opponents,  while 
we  made  a  considerable  loss.  This  sharj)  lesson  taught  us  the  im- 
portance of  confining  our  business  to  brokers,  who  always  have  a  prin- 
cipal beliind  them,  and  who  exercise  their  own  judgment  on  a  stock  be- 
fore presenting  it  to  us. 


AS  GENERAL  MANAGER  IN  MONTRKAE.      375 

With  commercial  credits  our  exptvience  lias  not  been  fortunate.  We 
have  never  done  a  large  business  in  this  line,  hut  the  average  of  loss  has 
been  high.  The  worst  was  the  case  of  a  credit  grant«d  to  a  cou])Ie  of 
young  Englishmen  of  the  half -gentleman  class  that  I  have  referred  to 
in  a  former  chapter.  Their  business  was  in  exporting  grain,  ^^'hat  they 
did  in  this  line  was  perfectly  satisfactory.  Bnt  on  one  occasion  they  took 
a  fancy  to  dabble  in  the  importation  of  steel  rails,  which  they  thought 
were  likely  to  advance  heavily.  A  small  clique  of  fellows  of  the  same 
class  as  themselves  were  in  this  venture.  We  gave  them  a  credit  to  import 
a  thousand  tons,  a  great  mistake  as  it  proved,  for  they  were  not  in  the 
business;  and  the  price  instead  of  advancing,  fell  heavily.  By  this  and 
similar  operations  the  firm  was  ruined.  Some  circumstances  transpired 
in  our  case  which  created  a  suspicion  of  fraud,  and  we  prosecuted  one 
of  the  parties,  but  got  no  satisfaction.  We  did,  however,  get  judgment 
against  each  of  them  individually.  The  younger  of  the  firm  went  home 
to  his  father,  a  country  gentleman  in  the  West  of  England.  We  sent  the 
judgment  to  London  for  execution,  but  the  young  fellow  was  always  kept 
out  of  the  way.  Tlie  next  time  I  went  to  England  I  tliought  well  to  go 
down  to  see  the  father  and  endeavor  to  effect  a  compromise.  But  he 
flatly  refused  to  see  me,  and  soon  afterwards  he  sent  his  son  out  to  In- 
dia.. Many  years  afterwards  we  heard  that  he  had  returned,  and  that  he 
was  about  to  be  married.  This,  we  saw,  was  our  chance.  We  threatened 
to  put  our  judgment  into  execution.  An  ol^fer  of  compromise  was  made 
at  once,  ^^'e  refused  to  take  it.  The  offer  thereupon  was  doubled,  and 
after  consultation  with  our  agents  in  P^ngland,  we  concluded  to  settle  on 
these  terms.     And  thus  ended  this  disagreeable  business. 

Only  on  one  or  two  occasions  during  a  long  course  of  heavy  business 
in  New  York  have  we  suffered  by  actual  fraud.  We  have  bought  millions 
of  pounds  of  sterling  bills,  every  year,  and  made  loans  on  stocks  aggre- 
gating as  has  been  said,  lumdreds  of  millions,  but  have  never  had  a 
forged  bill  of  exchange  on  our  hands,  nor  a  fraudulent  certificate  of 
stock. 

But  we  were  vietiini/id  on  one  occasion  by  the  prcsiiitalion  of  forged 
bills  of  lading  under  cii'cumstances  more  remarkable  than  anything  in 
mj'^-long  banking  experience,  or  perhaps  in  the  experience  of  New  York 
itself.  It  was  a  sad  case,  and  one  would  willingly  draw  the  veil  of 
silence  over  it.  But  as  these  reminiscences  are  written  as  lessons  of  in- 
struction, I  cannot  pass  it  by.  Moreover,  the  transactions  were  all  made 
public  through  the  courts. 

We  had  much  business,  both  in  Chicago  and  New  York,  with  an  ex- 
porting firm  of  the  highest  standing,  whose  very  name  carried  an  assur- 
ance of  resisectability  and  honor.  Eor  many  years  nothing  could  be 
more  satisfactory.  On  one  occasion,  however,  they  departed  from  the 
usual  course  and  instead  of  offering  bills  of  exchange  with  documents 
Ihey  presented  the  documents  themselves,  and  desired  a  temporary  loan 


376  BANKING    AND    COMMERCE. 

upon  them — the  bills  to  be  brought  in  subsequently.  The  transaction 
seemed  reasonable,  although  a  little  out  of  course,  and  the  loan  was  made, 
which  was  of  considerable  amount.  One  cr  two  days  passed.  The  bills 
were  not  brought  in.  The  Produce  Exchange  was  next  startled  to  hear 
that  the  firm  liad  failed.  But  infinitely  N\orse  than  this  was  the  discovery 
that  the  documents  were  forgeries.  It  was  incredible.  Such  a  firm 
might  fail,  but  Forgery  was  unthinkable.  It  was,  however,  only  too  true. 
Apprehension  and  trial  followed.  A  plea  of  insanity  was  put  in,  but 
nothing  resulted.  The  estate  barely  paid  the  expense  of  the  liquidation, 
and  the  bank  lost  the  whole  amount  of  the  loan. 

It  was  a  heavy  blow.  But  we  could  hardly  blame  the  managers  under 
such  circumstances,  and  we  bore  the  reverse  with  the  philosophy  which 
all  banks  have  to  exercise  at  times,  when  some  unforeseen  trouble  be- 
falls them. 

JoURXEY    TO    THE    SoUTH. 

Our  o-eneral  sterling  business  was,  on  the  whole,  most  satisfactory, 
and  in  connection  with  the  most  important  branch  of  it,  the  purchase  of 
cotton  bills  from  the  South,  we  had  not  a  single  casualty,  large  as  the 
annual  turn-over  was. 

It  is  a  good  rule  for  a  banker  to  have  personal  acquaintance  with 
those  he  deals  with,  and  in  furtherance  of  this  idea,  I  proposed  to  one  of 
our  New  York  managers  that  we  should  take  a  journey  down  South  to- 
gether, and  make  tlie  acquaintance  of  the  firms  whose  bills  we  had  bought 
in  the  aggregate  for  so  many  millions.  We  therefore  made  the  journey, 
visiting  Charleston,  Savannah,  Pensacola  (to  see  a  timber  firm  there 
whose  business  was  in  charge  of  a  young  man  who  had  been  one  of  our 
clerks).  New  Orleans  and  Memphis.  At  each  place  we  called  upon  mer- 
chants and  bankers,  discussing  with  them  the  prospects  of  trade  and 
movements  of  business  and  finance.  It  was  one  of  the  most  interesting 
journeys  of  my  life.  The  bankers  were  thoroughly  modern  in  ideas  and 
methods,  and  the  merchants  were  men  of  more  than  average  intelligence, 
so!ne  of  them  sent  out  from  Liverpool  to  represent  great  cotton  houses 
of  that  cit}',  and  being  in  the  habit  of  paying  periodical  visits  to  Eng- 
land, France,  and  other  cotton-consuming  countries.  And  it  surprised  me 
to  learn  what  a  large  portion  of  the  crop  was  sent  to  Continental  coun- 
tries. 

Silver  Agitation. 

During  the  great  Presidential  Campaign  of  that  time,  under  Bryan 
as  a  candidate,  -vve  were  in  constant  anxiety  as  the  phases  of  the  contest 
unfolded  themselves.  All  our  loans,  whether  on  call  or  on  time,  were 
made  payable  in  gold,  but  we  were  very  certain  that  if  the  Bryan  policy 
prevailed;  gold  would  go  to  a  premium.  There  would  be  a  natural  limit 
to  this;  depending  on  the  ratio  that  was  fixed.  But  the  premium  would 
certainly  be  enougli  to  make  it  extremely  difficult  for  brokers  to  fulfil 
their  contracts.     It  would  therefore  inevitably  bring  serious  elements  of 


AS    GEXERAI.    MANAGER    IN    MONTREAL.  377 

difficulty  and  danger  into  a  business  wliieh  liad  ahvays  been  eminently 
satisfactory.  Foreseeing  this  we  gradually  eurtaib'd  our  loans,  and  by 
the  time  of  the  election  had  reduced  them  to  a  very  triHing  amount.  But 
the  good  sense  of  the  American  people  once  more  jirevaibd.  'I'hc  crisis 
was  safely  passed.  Business  resumed  its  ordinary  course  and  we  soon 
put  out  money  to  as  large  an  extent  as  usual.  But  there  was  a  time 
during  this  agitation  when  gold  did  become  difficult  to  obtain,  and  we 
once  actually  paid  a  premium  for  a  considerable  amount  we  desired  to 
tvansfer  to  Montreal.''" 

Visits  to  Commercial  Centres  in  Engt.vxd — The  Baring  Crisis. 

In  connection  with  our  sterling  business,  both  in  New  York  and 
Montreal^  I  paid  periodical  visits  to  England,  and  spent  much  time  in 
the  great  centres  acquiring  information.  This  I  could  easily  do,  through 
our  banking  correspondents  in  Eondon,  Liverpool,  Glasgow  and  Bristol, 
from  whom  I  received  much  of  what  may  be  called  inside  information, 
that  could  never  have  been  obtained  otherwise.  This  we  used  for  the 
guidance  of  our  sterling  operations  in  New  York  and  Montreal.  As  a 
specimen  of  the  kind  of  information  given  to  me,  I  will  mention  several 
instances,  withholding  names  of  course.  They  occurred  many  years  ago. 
In  one  of  the  above-named  centres,  a  commercial  firm  had  for  years 
maintained  the  highest  standing,  and  was  marked  with  the  highest  marks 
in  Reference  Books.  Bills  upon  this  house  it  was  generally  considered 
safe  to  take  to  any  amount.  But  while  in  that  city  I  was  confidentially  in- 
formed that  tho  senior  partner,  to  whom  nearly  all  the  capital  belonged, 
had  retired  from  the  firm  about  a  year  before.  This  was  not  generally 
known.  The  name  was  retained;  so  was  the  rating  in  reference  books, 
and  the  business  was  going  on  as  usual.  But  the  strength  of  the  firm  was 
so  diminished  that  it  was  practically  a  different  concern.  I  therefore  ad- 
vised New  York  office  to  have  all  bills  upon  that  firm  in  future  accom- 
panied by  documents.  In  the  same  city,  with  regard  to  another  firm,  and 
in  a  different  branch  of  business,  I  learned  other  particulars  which  I 
deemed  important  enough  to  cable  out  at  once.  I  always  carried  a 
special  cipher  with  mc  in  these  visits  abroad.  The  cable  cost  about  five 
dollars,  but  it  was  wortli  t<  m  tliousand;  for  the  firm  failed  shortly  after- 
wards. 

The  Baring  Crisis. 

All  the  world  knows  now  of  what  was  impending  some  years  ago  ovet 
the  great  house  of  Bnri)i<r,  and  how  under  the  lead  of  the  Bank  of  Eng- 
land the  resources  of  all  the  banks   in   the  country  were   skillfully  com- 


13  I  had  read  a  paper  before  the  American  Bankers  Association  at  Chicago 
some  time  previously,  on  this  silver  question,  taking  of  course  the  view  enter- 
tained  in   New   York  and   the   East. 

It  was  received  with  general  favor,  except  by  a  gentleman  who  was  not  a 
banker   at  all. 


378  BAXKINXt    and    COMMERCE. 

Mned  to  prevent  a  catastrophe  which  would  liave  shaken  credit  to  its 
foundations  all  over  the  world.  I  was  in  London  some  months  before 
this  intervention  took  place,  and  heard  whispers,  in  the  strictest  con- 
fidence, that  the  great  house  was  getting  into  deep  water.  This  was  a 
kind  of  thing  that  no  man  could  talk  about;  but  I  gave  instructions  of  a 
secret  and  confidential  character  to  New  York  to  limit  their  purchases  of 
the  bills  to  a  moderate  sum.  This  was  our  policy;  and  when  the  crisis 
supervened  it  would  not  have  mattered  materiallj'  even  if  an  actual  stop- 
page had  taken  place. 

Cjiicaco  and  Mixxeapolis. 

About  the  year  1879  "vve  opened  an  office  in  Chicago.  Montreal  and 
Cliicago  are  closely  connected  in  trade.  One  of  our  largest  customers 
did  a  heavy  and  legitimate  business  there,  and  some  of  our  directors  were 
well  acquainted  with  the  mercantile  people  of  the  city.  The  vice- 
president  accompanied  me  to  look  over  the  ground,  and  together  we  in- 
terviewed a  number  of  men  in  the  grain  and  provision  trade.  They  gave 
us  considerable  encouragement,  and  our  report  to  the  board  was  favor- 
jible.  We  therefore  opened,  taking  a  very  good  office  in  a  leading  position 
near  LaSalle  Street,  and  soon  had  plenty  of  applications  for  loans  on 
'.warehouse  receipts  as  collateral.  But  our  experience  on  the  whole  was 
disappointing.  We  had  hoped  and  expected  to  build  up  a  good  line  of 
deposits,  and  in  time  to  have  the  accounts  of  interior  banks.  This  ex- 
pectation was  not  fulfilled.  All  the  money  we  loaned  had  therefore  to 
be  drawn  from  our  resources  in  New  York,  and  although  we  could  gen- 
erally calculate  on  a  steadily  higher  rate  of  interest,  we  found  at  the  end 
of  a  year  that  the  net  result  was  little  better  than  we  could  have  real- 
ized had  we  left  our  money  there.  We  found,  too,  that  though  our  loans 
v.ere  abundantly  safe  so  long  as  grain  remained  in  warehouse,  we  had  to 
take  the  risk  of  its  removal,  and  surrender  our  security  for  several  days 
at  a  time,  having  nothing  but  our  customers'  pledge  to  replace  it.  We 
had  been  assured  that  a  default  in  this  matter  was  almost  unknown;  that 
not  one  instance  in  a  thousand  of  defaults  had  taken  place.  This  was  so 
far  assuring.  Still,  we  could  not  help  feeling  that  possibly,  at  some  time, 
we  might  be  that  one. 

We  might,  however,  have  remained  in  Chicago,  Init  that  one  of  the 
"corners"  in  grain  that  distinguish  it,  transpired  while  we  were  there. 
Margins  ra2)idly  ran  down,  and  we  had  considerable  grain  out  on  bailee 
receipts.  For  three  days  we  were  in  a  state  of  uncertainty  as  to  whether 
our  customers  could  stand  the  shock  or  not.  By  that  time,  however, 
margins  wen  made  good,  and  grain  was  shipped.  Our  customers  were 
standing,  and  going  on  with  their  business,  but  I  had  been,  more  or  less, 
"on  the  rack"  during  that  time,  and  not  feeling  sure  but  that  something 
of  the  kind  might  ha])pen  again,  I  concluded  to  recommend  the  board 
that  we  should  withdraw  from  the  field,  which  we  did  some  time  after- 
wards.    We   had   one  or  two  trifling  losses,  not   worth  troubling  about, 


AS    GENERAT.    MANAGER    TV    MON  TREAL.  379 

and  which  were    fully   rrcoupfd  hy   tin-  .iiliMiuud   v.ilur  of  llii-   lioard  of 
Trade  seat  held  1)\-  our  uiauaii-cr. 

Our  Chicago  (experience,,  however,  was  not  tiirown  away,  as  it  enabled 
us,  with  more  intelligence  and  confidence,  to  carry  those  loans  on  grain 
in  Duluth  and  Minneapolis,  which  were  so  prominent  a  feature  of  our 
business  some  years  afterwards.  The  Alinneapolis  loans,  however,  I  may 
say,  were  always  guaranteed  by  a  bank,  and  were  done  at  a  slightly  lower 
rate  of  interest  on  that  account.  The  Duluth  loans  were  made  direct, 
but  und(>r  the  supervision  of  a  former  officer  of  a  Canadian  bank,  whom 
we  could  implicitly  trust.  While  in  Duluth  on  one  occasion  in  connection 
with  our  loans  thci-c  I  made  a  thorough  examination  of  the  system  under 
which  warehouse  receipts  for  grain  were  granted  and  cancelled.  A  per- 
fect system  of  registration  was  kept  up,  and  irregularities  rendered 
almost  impossible.  I  have  often  wished  that  some  system  of  the  same 
kind  was  in  force  in  ^lontreal. 

All  these  loans  were  made  on  what  are  known  as  Terminal  receipts. 
Receipts  of  warehouses  in  the  interior  have  ])r()ved  troublesome,  and  I 
have  never  encouraged  them. 

Visit  to  ]\rAXiTOB.\. 
In  the  summer  of  the  year  1878  I  determined  to  pay  a  visit  to  Mani- 
toba for  the  purpose  of  examining  the  business  of  our  branch  in  Winni- 
peg. There  was  no  route  to  the  Northwest  at  that  time  except  via 
Chicago  and  St.  Paul.  The  first  was  comparatively  familiar;  but  beyond 
Chicago  I  had  never  travelled.  I  stayed  over  a  day  in  St.  Paul,  as  we 
had  some  banking  connections  there.  It  was  at  that  time  a  somewhat 
sleepy-looking  old  place,  and  much  unlike  its  active  neighbor  :Minneapolis. 
St.  Paul,  however,  was  said  to  be  much  the  more  wealthy  of  the  two. 

Resuming  my  journey  to  Winnipeg,  by  a  night  train,  I  well  remem- 
ber opening  my  eyt  s  in  the  morning  and  seeing  what  appeared  to  be  a 
vast  extent  of  ocean.  I  could  not  conceive  at  first  what  it  was,  for  I 
knew  we  were  a  long  way  from  Lake  Superior;  but  at  last  it  dawned 
upon  me  that  this  was  the  beginning  of  the  great  prairies  of  the  North- 
west. And  so  it  was.  I  had  seen  the  cultivated  prairies  west  of  Chicago, 
but  never  had  my  eyes  beheld  such  a  vast  ex])ansc  of  unoccupied  ocean- 
like green  wilderness.  We  sped  on  our  way  through  wliat  was  then  an 
almost  wholly  unsettled  country,  and  late  in  the  afternoon  we  reached 
Winnipeg. 

Winnipeg  had  then  about  six  thousand  inhabitants,  and  the  business 
of  the  branch  was  of  about  the  same  extent  as  that  of  an  Ontario  town 
of  the  same  size.  No  one  who  knows  the  splendid  capital  of  the  Canadian 
Northwest  now,  with  its  handsome  streets,  magnificent  imblic  buildings, 
banks  (there  are  eleven  of  them),  great  warehouses,  and  beautiful  boule- 
vards of  villa  residences,  can  conceive  what  Winnipeg  was  at  that  time. 
It  was,  in  fact,  little  better  than  a  straggling  village.  Its  streets  were 
entirely    unpaved.      At    the    southern    extremity    stood    the    historic    Eort 


380  BANKING    AND    COMMERCE. 

Garry,  the  lieadqiiartcrs  ot  the  Hudson  Bay  Company,  and  once  the 
scene  of  the  stirring  events  of  the  Kiel  rebellion.  The  Merchants'  Bank 
was  the  first  established  in  the  Northwest,  and  its  supplies  of  money 
were  sent  by  long  journeys  over  the  vast  stretches  of  prairies  to  the 
infant  city.  We  did  nearly  all  its  banking  business  for  some  years,  and 
indeed  of"  the  whole  Northwest.  But  it  was  a  small  affair  at  the  best. 
Save  and  except  the  forts  of  the  Hudson  Bay  Company— little  centres 
of  civilization  amidst  surrounding  solitudes— there  practically  was 
nothing  in  the  interior.  Now  traversed  by  railways  in  all  directions,  it 
was  then  utterly  untrodden,  except  along  the  trails  of  the  enterprising 
voyageurs  of  the  great  Company. 

'  While  1  was  in  Winnipeg,  sitting  in  the  manager's  room,  a  travel- 
stained  messenger  came  in,  bearing  a  package  of  letters.  He  had  come 
from  a  far-distant  settlement  in  which  a  few  -traders  had  gathered  with 
whom  the  bank  did  business.  The  manager  asked  him  how  long  he  had 
been  on  the  road.  He  replied,  sixteen  days.  Noticing  that  the  packet 
vas  damp,  the  manager  ask  the  messenger  what  was  the  reason.  He  re- 
plied that  he  could  not  always  keep  the  packet  out  of  the  water  when  he 
was  fording  the  rivers.  The  place  is  now  a  prosperous  town  within 
sixteen  hours  of  Winnipeg. 

We  had  some  customers  in  a  village  about  sixty  miles  away,  called 
Portage  LaPrairie,  at  the  extremity  of  settlement  and  civilization,  and 
being  desirous  to  see  the  interior  for  myself,  the  manager  made  arrange- 
ments for  a  journey  there.  The  first  fifteen  miles  was  through  scattered 
settlements  along  the  Assiniboine  River.  We  then  struck  out,  across  the 
uninhabited  prairie,  and  in  about  an  hour  were  fairly  "out  of  sight  of 
land"  so  to  speak.  Not  a  single  thing  was  in  sight  but  the  great  ocean- 
like expanse,  all  around  us,  and  as  we  drove  along,  hour  after  hour,  I 
could  not  help  thinking  what  would  happen  if  we  lost  the  trail,  and  we 
found  ourselves  alone  in  a  trackless  wilderness.  A  small  speck  appeared 
after  a  time  upon  the  horizon.  The  speck  enlarged  until  it  became  a 
farm-house,  standing  alone,  in  the  great  expanse.  We  passed  through 
the  farm-yard,  and  then  struck  out  once  more  into  the  open  prairies, 
arriving,  after  passing  a  few  farms,  at  Portage  LaPrairie  in  the  after- 
noon. In  the  sixty  miles,  which  we  then  traversed,  there  are  now  f.ve 
stations  of  the  Canadian  Pacific  Railway,  and  the  last  ten  miles  of  our 
journey  now  form  part  of  one  of  the  finest  wheat-growing  regions  of 
the  continent.  Portage  LaPrairie.  now  such  a  prosperous  and  thriving 
town,  with  three  or  four  banks,  and  great  mills  and  elevators,  was  then 
a  dirty  little  village,'^  the  only  "hotel"'  being  a  miserable  little  tavern, 
something  like  the  Eagle  Hoti'l  in  the  story  of  "David  Ilarum." 

14  Yet  it  is  curious  how  in  sucli  places,  in  the  extreme  frontiers  of  civiliza- 
tion, are  often  to  be  found  Englishmen,  or  Scotchmen,  of  high  refinement  and 
good  family  connections.  Our  principal  customer  there  was  a  grain  merchant. 
I  found  him  a  perfect  gentleman,  a  nephew  of  the  Bishop  of  Norwich.  In  his 
warehouse  was  a  stalwart  young  fellow  busy  amongst  the  grain.  He  was  of  the 
Oiirn.y    family,    the    great    bankers    of    Norfolk    and    other    parts    of    England.      I 


AS   GENERAL    AfANAGER    IX    MONTREAL.  3Sl 

Jityoiul  Portairt'  LaPrairic  llicrc  was  al  that  tiiiif  practically  tiotliiiig. 
In  tlic  regions  beyond,  wlicrc  now  there  are  such  nunihers  ol"  towns, 
bank  offices,  magnificent  farms,  cattle-ranclies,  coal  mines,  and  thousands 
of  miles  of  railway  stretching  on  to,  and  through  the  Rocky  Mountains, 
and  -where  a  hundred  millions  of  busluls  of  grain  were  grown  this  year 
(19O8),  nothing  was  to  be  seen  but  herds  of  buffalo,  Indians  of  numerous 
tribes,  and  the  forts  of-  the  Great  Company.  Only  thirty  years  have 
elapsed  since  my  visit,  yet  in  that  short  time  a  new  world  has  hccn 
evolved  from  the  wilderness. 

The  journey  home  was  unattended  by  incident,  but  I  could  not  fail 
to  have  realized  what  enormous  stretches  of  country  are  contained  in 
this  Northwest,  and  formed  some  idea  of  its  possibibtirs.  when  a  con- 
venient way  to  it  was  ojjened  up. 

The  ]\L\nitora  Boom. 

Little,  however,  did  I  dream  of  the  extraordinary  developments  that 
were  to  come.  It  was  only  three  or  four  years  after  this  that  the  first 
signs  of  the  "Manitoba  Boom"  began  to  ajipcar.  The  Pacific  Railway 
was  being  pushed  with  extraordinary  energy,  and  made  it  easy  to  traverse 
regions  till  then  inaccessible  and  practically  unknown.  But  the  more 
Hie  country  was  known,  the  more  highly  it  was  reported  of.  Yet  the 
land  could  then  be  bought  for  one  or  two  dollars  an  acre.  An  idea,  how- 
ever, soon  arose  in  older  Canada  tliat  these  lands  must  largely  increase  in 
value.  Reports  of  the  condition  of  things  were  constantly  sent  to  the 
older  provinces,  and  gradually  a  heavy  speculative  demand  sj^rung  up 
from  the  East.  Along  with  the  stream  of  hona-pde  settlers,  which,  how- 
ever, was  never  a  large  one  at  that  time,  there  came  to  the  Province  a 
number  of  speculators  in  land,  with  money  in  hand,  who  began  to  make 
})urchases,  more  or  less  extensive,  here  and  there,  as  more  and  more  of 
the  country  was  opened  up.  These  early  speculators  all  made  money. 
Rei)orts  of  their  successes  spread  about.  More  and  more  men  were  led 
to  invest  mone}',  and  before  long  the  "land  fever"  began  to  work.  As  is 
usual  in  such  developments,  men  soon  ceased  to  take  a  practical  view  of 
j)ossibilities,  and  instead  of  this,  "to  dream  dreams  and  see  visions." 
Men  began  to  say  that  instead  of  two  or  three  dollars  an  acre  prairie  land 
was  worth  ten  or  tiventy,  and  as  to  town  lots,  nobody  could  imagine  how 
much  they  were  worth.    The  ball  gathered  momentum  rapidly.    Swarms  of 

had  an  introduction  to  anotlier  customer  who  lived  at  the  hotel.  He  proved  an 
extraordinary  fellow,  one  of  those  who  have  knocked  about  the  world  until 
they  are  tired;  who  know  everybody  and  have  seen  everything.  We  talked  far 
into  the  night— mostly  about  England.  I  mentioned  that  I  was  from  Yorkshire. 
He  knew  the  county  well.  I  spoke  of  the  great  Fitzwilliam  family  of  the  neigh- 
borhood where  I  was  born.  Strange  to  say,  he  knew  them,  too,  and  told  me  a 
curious  story  about  a  blacksmith  who  owned  a  little  freehold  near  their  es- 
tates. A  traveller  calling  one  day  to  get  his  horse  shod,  enquired  who  owned 
most  of  the  land  thereabout,  on  which  the  blacksmith  replied,  "OH,  IT  ALL  BE- 
LONGS   TO    ME    AND    LORD    FITZWILTJ.VXr." 


382  BANKINO    AND    COMMERCE. 

Eastern  peo))lc  went  up  to  Winnipeg  with  money,  deposited  it  in  the  bank, 
and  bought  all  they  could  lay  their  hands  on,  paying  down  money  for 
the  first  instalment  and  giving  mortgages  for  the  balance.  The  great 
speculation  was  in  town  lots.  At  favorable  points  traders  and  store- 
keepers began  to  settle,  and  numbers  of  places  were  marked  out  as  the 
towns  of  the  future.  Now,  while  there  is  a  natural  limit  to  the  price  to 
which  farming  lots  might  rise,  who  could  tell  what  might  be  the  value 
of  lots,  in  the  future  town,  or  cit}'?  In  Winnipeg  itself  and  round  about, 
and  in  little  places  of  fifty  or  a  hundred  inhabitants,  which  people 
imagined  might  grow  to  towns,  or  cities,  a  perfect  furore  of  demand  set 
in  for  the  possession  of  the  lands  round  about,  which  were,  by  and  by, 
to  be  covered  with  streets,  stores  and  dwellings.  The  experience  of 
Ontario  in- 1856  was  repeated  in  even  a  more  extravagant  form.  Thou- 
sands of  people  went  on  buying  and  borrowing  with  the  utmost  con- 
fidence, making  payments  down  wilh  their  ready  money,  and  entangling 
themselves  with  mortgage  obligations,  spread  over  long  terms  of  years, 
selling  when  they  could  to  others,  at  continually  enhanced  prices  on  the 
same  long  terms  and  never  dreaming  of  the  covenants  on  their  mortgages 
which  were  to  drag  tliem  down  to  ruin. 

^Meanwhile  the  business  of  our  Winnipeg  Branch  was  growing  to  enor- 
mous proportions.  Deposits  increased  tenfold.  The  qmount  of  trans- 
actions passing  through  the  office  was  incredible.  The  counter  was 
thronged  from  morning  to  night  by  such  crowds  as  are  found  at  the 
doors  of  an  Opera  House  when  some  celebrated  prima  donna  is  perform- 
ing. A  stranger  would  have  supposed  that  some  heavy  run  was  taking 
place;  but  it  was  just  the  opposite.  Most  of  these  people  wanted  to  de- 
posit money,  or  to  put  in  drafts  for  collection  on  distant  points,  trans- 
ferring money  to  Winnipeg.  The  president  and  myself  visited  Manitoba 
while  this  boom  was  at  its  height  and  saw  all  this  with  our  own  eyes. 

During  this  inflation,  as  is  always  the  case,  a  style  of  extravagant 
living  prevailed  which  set  all  reason  at  defiance.  Nothing  was  too  good 
for  people  to  eat,  drink  or  wear.  Champagne  flowed  like  water.  Plain 
and  comfortable  churches,  such  as  were  suitable  to  a  moderate-sized 
town,  were  replaced  by  costl\^  erections,  fit  for  Montreal  or  New  York. 
Houses  were  built  of  the  best  materials  and  style,  of  one  of  which  it 
was  said  that  every  brick  (they  were  imported  from  an  immense  distance) 
had  cost  a  dollar.  Yet  the  real  business  of  the  country  was  so  small  that 
its  exports  of  wheat  scarcely  amounted  to  a  million  bushels  a  year.  I 
remember  answering  to  a  querj-^  of  a  house  in  the  grain  trade  in  New 
York  with  whom  we  did  business,  that  there  was  not  grain  enough  in  the 
whole  of  Manitoba  at  that  time  to  make  it  worth  their  visiting  it. 

After  two  years,  signs  of  reaction  set  in.  Dreams  and  visions  gave 
place  to  practical  realities.  Men  that  had  settled  on  farm  lands  realized 
Die  difl'erence  between  the  cleared  farms  of  Ontario  and  the  prairie  farms 
of  a  province  in  the  interior  of  the  continent.  Ideas  of  value  began  to 
settle   down.      The   twintv   dollars   an   acre   became   ten;   the  ten    i\\\\  the 


AS  GENERAL  MANAGER  IN  MONTREAL.      383 

five  two;  and  men  that  had  sivcn  mort;2:agcs  at  fifteen  and  twenty  dollars 
an  acre  found,  when  they  could  only  sell  to  actual  settlers,  that  five 
dollars  an  acre  was  the  utmost  they  could  get  for  the  best  lands.  Loan 
companies  that  had  lent  money  on  security  of  prairie  lands,  town  lots, 
stores,  churches,  and  warehouses,  found  that  the  security  in  hundreds  of 
cases  would  not  realize  half  or  a  quarter  of  the  loan. 

As  to  the  banks,  nearly  all  their  mercantile  customers  had  become 
entangled  in  land  speculation,  and  were  caught  in  the  reaction.  Their 
trade  bills  were  largely  drawn  on  men  who  had  speculated  and  failed. 
Many  of  these  bills  represented  goods  of  the  extravagant  style  before 
mentioned,  which  goods  were  never  paid  for  by  the  purchasers.  Some 
bills  were  for  more  than  the  makers  owed,  and  some  were  downright 
forgeries.  INIanufacturing  enterprises,  saw  mills,  foundries,  fisheries  and 
such  like  collapsed.  Thousands  of  speculators  whose  operations  had 
once  made  business  to  boom,  left  the  province  bankrupt.  Failures  mounted 
up  to  terrible  figures.  The  banks  had  their  cases  full  of  past-due  bills. 
In  one  town  every  single  trader,  with  one  exception,  became  insolvent.  In 
that  town  the  losses  of  the  Merchants'  Bank  amounted  to  seventy-five 
per  cent,  of  its  whole  discounts.  Some  ambitious  churches  now  became 
practically  bankrupt,  and  made  proposals  of  compounding  with  their 
creditors.  This  revulsion,  however,  never  became  a  panic.  It  was  ex- 
actly like  that  of  1857  in  that  it  dragged  along  for  years,  bearing  down 
with  an  increasing  heaviness  as  the  j^ears  passed  on.  Its  effects  were  not 
confined  to  ^Manitoba,  but  were  felt  in  all  parts  of  Canada.  Three  im- 
2:)ortant  customers  of  the  bank  who  were  utterly  unconnected  with  Mani- 
toba in  the  way  of  business,  failed  in  after  years  owing  to  their  specula- 
tions in  the  time  of  this  land  boom.  As  to  our  customers  in  Manitoba 
itself,  only  a  few  of  them  survived.  We  had  made  very  heavy  profits 
during  the  time  of  the  inflation,  but  with  all  our  care,  and  the  constant 
directions  given  to  our  managers,  they  could  not  help  their  judgment 
being  biased  as  to  the  character  of  the  transactions  ofi'ered  them.  Masses 
of  landed  property  came  into  our  hands,  formerly  belonging  to  our 
customers,  and  held  by  them  at  inflated  prices;  also  endless  claims  against 
traders,  customers  of  our  customers,  scattered  over  distant  parts  of  the 
immense  interior.  To  deal  with  these  I  organized  a  separate  depart- 
ment of  the  office  in  Winnipeg,  and  it  was  only  after  many  years  that  its 
functions  ceased.  We  Avrote  off  large  sums  for  losses  year  after  year, 
but  I  fancy  other  banks  (for  by  this  time  there  were  others  in  the 
Province)  had  at  least  as  severe  an  experience  as  ourselves  proportionally, 
and  one  of  them  (not  now  in  existence)  a  far  worse.  For  our  profits 
exceeded  our  losses  coiisidc  rably. 

The  Bankers'  Association. 

The  general  managers  of  the  banks  had  met,  as  usual,  in  Ottawa  in 
1881  for  the  purpose  of  conferring  with  the  Finance  Minister,  and  on 
the   journey   home   the   suggestion   "vvas   made,    I    think,   by   Mr.    F.    W. 


384.  BANKING    AND    COMMERCE. 

Thomas  of  tlie  .Molsons  Bank,  that  it  would  be  desirable  to  form  a  per- 
manent association  for  the  furtherance  of  our  mutual  interests.  The 
idea  Mas  received  with  favor,  and  shortly  afterwards  we  began  to  confer 
as  to  the  basis  on  which  it  should  be  formed.  We  found  it  a  difficult  sub- 
ject. The  first  difficulty  was  to  settle  the  question,  who  should  be  mem- 
bers.^ After  much  discussion  and  corresijondence,  it  was  finally  agreed 
that  the  membership  should  consist  of  the  banks,  as  corporations,  each 
lo  act  by  its  principal  Executive  Officer,  whether  he  were  called  presi- 
dent, general  manager,  or  cashier.  On  thi?  basis,  the  government  of  the 
Association  was  to  rest.  But  it  was  provided  that  a  class  of  associate 
members  should  be  formed,  composed  of  all  bank  officers  who  desired 
.to  join  and  would  pay  a  small  subscription.  This  arrangement  of  the 
membership  has  worked  exceedingly  well.  Another  question  was  as  to 
what  powers  the  Association  should  exercise  over  its  own  members.  Dis- 
cussion had  not  proceeded  far,  however,  on  this  head,  when  it  became 
clear  to  us  all  that  of  actual  poM'er,  the  Association  could  exercise  none  at 
oil.  It  Avas,  liowever,  felt  that  it  would  be  reasonable,  in  the  case  of  any 
bank  departing  unduly  from  the  rules  of  safe  banking,  that  the  matter 
might  be  discussed  in  some  confidential  committee  of  the  Association, 
and  a  friendly  intimation  in  the  general  interest  conveyed  to  the  bank 
concerned.  This  was,  however,  a  matter  of  extreme  delicacy,  and  I  am 
not  sure  that  it  has  ever  been  acted  upon. 

Of  this  Association  I  was  elected  the  first  President,  the  position 
having  been  naturally  offered  to  Mr.  E.  S.  Clouston,  General  Manager  of 
the  Bank  of  Montreal,  who  declined  to  accept  it.  Subsequently,  however, 
he  accepted  the  position  and  has  held  it  ever  since. 

IvENEWAL   OF    BaNK    CHARTERS   AND   THE    SECURING   OF    ClUCULATION    BY   A 

First  Lien  on  Assets,  and  Redemption  Fund. 

When  the  bank  charters  were  up  for  renewTil  in  1880-81  the  Finance 
Minister  again  brought  forward  the  proposal  that  we  should  cover  our 
circulation  by  Government  securities.  There  had  been  several  bank  fail- 
ures not  long  before  which  gave  weight  to  the  proposal.  As  had  been 
the  case  before,  the  general  managers  of  the  banks  had  met  in  confer- 
ence at  Ottawa  with  a  view  to  consider  whether  any  changes  in  the  Bank- 
ing Act  were  desirable.  The  idea  had  been  mooted  by  some  of  us  that 
the  best  possible  security  for  the  notes  would  be  to  make  them  a  first 
charge  on  all  the  assets  of  banks,  including  the  double  liability  of  stock- 
holders. It  was  jierfectly  reasonable  that  they  should  be  so,  inasmuch  as 
holders  of  notes  Mere  involuntar}'  creditors.  The  proposal  to  cover  by 
Government  securities  met  M'ith  strenuous  opjjosition,  es])ecially  from  the 
M'estern  Banks,  and  in  conference  M'ith  the  I'inance  Minister  m'c  argued 
the  matter  at  considerable  length.  Sir  Leonard  Tilley  asked  me  to  state 
the  case  for  the  banks,  M'hich  I  did,  draM'ing  on  the  experience  of  1868- 
1871.     The  Ciovernment  finally  did  not  press  the  matter,  but  adojited  our 


xVS    GENERAL    MANAGER    IN    MONTREAL.  3S5 

alternative  proposal.  Tliis  liad  a  ver}'  simple  look  on  i)apcr,  and  only  a 
few  lines  in  the  Banking  Act  were  required  to  make  it  law.  But  it  had 
a  very  far-reaching  aspect,  and  has  proved  in  practice  sufficient  to  make 
the  notes  safe,  even  when  a  bank  has  been  scandalously  or  even  fraud- 
ulently mismanaged.  At  llu'  next  renewal  of  the  charters,  still  further 
safeguards  were  introduced  in  the  shape  of  a  Redemption  Fund,  which, 
however,  it  has  never  been  necessary  to  put  into  oi)eration,  though  there 
is  held  by  the  Government  a  large  sum  available  for  the  purpose,  con- 
tributed by  the  banks  in  a  fixed  ratio  to  their  circulation. 

The  charters  of  the  banks  were  again  under  review  in  18.91  and  the 
Association  acted  with  considerable  eHeet  in  preventing  what  would  have 
been  an  undesirable  addition  to  the  Act.  It  is  easy  for  doctrinaires  to 
frame  theories:  it  is  only  practical  men  wjio  can  judge  of  their  effect. 
On  this  occasion,  as  once  before,  it  was  joroposed  to  introduce  a  promi- 
nent feature  of  the  American  system,  viz.:  the  compelling  by  law  of  a  fixed 
minimum  of  reserves  to  be  held  by  the  banks.  Against  this  we  were  a 
unit,  for  good  reasons.  We  argued  the  case  with  the  Finance  Minister^ 
but  like  most  doctrinaires  he  was  fixed  in  his  opinion,  and  insisted  on  its 
being  made  law.  We  then  took  the  strong  step  of  appealing  to  the  whole 
Cabinet.  The  Prime  Minister  (Sir  John  Macdonald)  was  again  in  power, 
and  a  hearing  was  courteously  conceded  to  us,  a  very  rare  favor.  We 
stated  our  case;  some  four  or  five  speaking,  the  most  prominent  being  the 
General  Manager  of  the  Bank  of  Commerce,  who  had  formerly  been 
manager  in  New  York,  and  could  speak  from  practical  experience.  At 
the  close  of  the  interview  the  Premier  desired  us  to  put  our  views  into 
writing,  which  was  done,  and  we  heard  shortly  after  that  the  clause  had 
been  abandoned. 

Thus  for  the  second  time.  Sir  John  overruled  his  Finance  Minister 
in  a  matter  that  concerned  the  banks.  It  was  on  this  occasion  that  the  fur- 
ther step  was  taken  in  the  way  of  making  bank  circulation  secure  by  the 
formation  of  Redemption  Fund  under  the  auspices  of  the  Government 
to  Avhich  all  the  banks  contribute.  I  always  had  the  impression  that  the 
making  notes  a  first  charge  would  render  any  further  assurance  un- 
necessary; and  events  have  so  proved  it.  The  fund,  however,  was  formed, 
and  when  its  jorovisions  came  to  be  understood,  it  was  found  that  under 
them  the  Avhole  of  the  banks  were  practically  guarantors  of  each  other's 
notes.  This  was  never  intended  by  its  promoters,  but  it  is  now  the  law, 
and  under  it  we  may  safely  assert  that  the  bank  circulation  of  Canada  is 
far  better  secured  than  that  of  any  circulation  in  the  world. 

Before  the  decennial  period  of  1901  was  reached,  some  scandalous 
revelations  took  place  with  regard  to  the  overissue  of  notes  by  a  bank 
that  had  failed  in  Montreal.  This  circumstance  gave  rise  to  a  good  deal 
of  discussion,  and  to  suggestions  with  regard  to  giving  the  Government 
increased  powers  of  supervision  over  the  banks.  Impracticable  ideas 
were  again  ventilated  and  discussed.  At  length  it  was  determined  that 
as  none  were  so  much  interested  in  the  matter  as  the  banks  themselves 


386  BANKING    AND    COMMERCE. 

(under  the  jJi'ovisions  of  tlic  bank  redemption  fund),  the  whole  regula- 
tion of  the  issue  and  cancellation  of  notes  should  be  committed  to  the 
Bankers'  Association,  which  had  been  already  incorporated.  The  re- 
sponsibility of  seeing  that  the  provisions  of  the  law  are  carried  out  was 
placed  upon  them,  and  they  speedily  organized  machinery  for  the  pur- 
pose. This  arrangement  has  worked  well,  and  is  as  likely  to  be  effective 
as  any  sort  of  supervision  by  Government  eould  be,  short  of  allowing  no 
notes  to  be  signed  that  have  not  been  printed  in  a  Government  depart- 
ment and  countersigned  by  Government  oJficers.  But  to  prevent  delil>- 
erate  schemes  of  fraud,  amounting  almost  to  forgery,  if  any  bank  di^ 
rectors  should  be  mad  enough  to  attempt  it,  is  impossible. 

The  Association  has  done  also  very  valuable  work  in  the  education 
cf  young  bankers,  and  has  published  and  is  now  carrying  on  a  journal 
which  an  English  banker,  well  qualified  to  judge,  once  pronounced  to  be 
more  ably  conducted  than  the  Bankers'  IMagazine  of  London. 

Retirkment  from  Banking. 

When  the  last  year  of  my  fourth  engagement  had  transpired,  I  had 
passed  the  boundary  of  three  score  years  and  ten.  Yet,  though  still  in 
vigorous  health,  I  was  anxious  that  an  arrangement  should  be  made  so 
that  the  wide  and  diversified  interests  of  the  bank  should  not  suffer  by 
any  failure  of  bodily  or  mental  vigor  which  woidd  inevitably  accompany 
advancing  years.  The  board  acquiesced  and  generously  furnished  me 
with  a  co-adjutor  of  experience,  who  took  upon  him  a  large  part  of  the 
burden  of  active  management,  until  the  time  came  at  length  for  me 
finally  to  part  with  the  cares  and  conflicts  of  banking,  and  to  retire  with 
an  ample  allowance  into  the  comparative  rest  of  private  life. 

I  thus  close  these  recollections,  trusting  that  they,  or  some  of  them, 
may  prove  to  be  in  the  nature  of  way-marks  to  guide,  or  beacons  to  warn, 
for  those  who  are  still  bearing  the  burden  and  heat  of  the  day  in  the 
banking  sphere  of  this  continent. 


George   Hague. 


MoNTREAt,  October,   ]f)08. 


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